FNMA Multifamily Small Loans for Apartment Financing

Small Apartment Financing with the Fannie Mae Multifamily Small Loan Program

Fannie Mae Multifamily Small Loan

When looking at the housing market objectively, the folks at Fannie Mae understood that owners and prospective owners of small rental properties have specific financing needs that to be met. Financing smaller rental properties is a unique and important facet of the rental housing market, in that subject properties are typically the forefront housing option for a majority of working families. As such, the Fannie Mae Multifamily Small Loan Program was designed specifically with this in mind.

Utilizing their industry-renowned delegated underwriting and servicing model, Fannie Mae tailored the Multifamily Small Loan Program to best meet the needs of borrowers and lenders in this market space. The multifamily small loan program was carefully developed and rigorously refined to be an uncompromising solution within this niche market, for borrowers not looking for the standard multifamily loan suite that is well known for lengthy documentation and a $3 million minimum. To date, with over $24 billion of liquidity added to the market since 2009, its only real competition comes from the similar Freddie Mac Small Balance Loan Program that targets the same audience.

There is no argument that Fannie Mae’s Small Loans are a strong option for small multifamily financing. Boasting a streamlined application process isn’t all these loans have to offer either. Multifamily Small loans from Fannie Mae are mostly non-recourse, have competitive interest rates, and are assumable with lender approval and a 1% assumption fee.

Why Choose a Fannie Mae Multifamily Small Loan?

Financing a small apartment or multifamily property doesn’t have to be a difficult endeavor. Luckily, the team at Fannie Mae seems to agree with this sentiment. The multifamily small loan program for apartment financing between $1 million and $6 million was designed with a streamlined application process to help make acquiring the funds you need that much easier.

When it comes to apartment financing, deciding on the small loan program is an easy choice to make. Fannie Mae small loan products are available nation-wide, with some pretty favorable loan terms to consider. Multifamily small loans are non-recourse (in most cases), have fixed-rate and highly flexible floating rate options, and require no tax returns. Additionally, borrowers can finance up to 3% of the loan’s closing costs, and there are no processing fees without written approval.

Chances are if you need a small apartment loan, there is a multifamily small loan product that will suit your investment needs. The program has fixed-rate terms of up to 30 years to hedge interest rate risk, as well as customizable floating rate options to better meet a sponsor’s investment goals and objectives. FNMA multifamily small loans are offered with a maximum LTV of 80%, with a 1.25 minimum DSCR requirement.

Fannie Mae Multifamily Small Loan Guidelines

Loan Size - From $1 million to up to $6 million

Loan Terms - Fixed rate terms of up to 30 years. Customizable floating rate and hybrid ARM options also available (can customize fixed-rate period on Hybrid ARM products as well as the amortization period). Partial and full-term interest-only also optional.

Amortization - Up to 30 years.

Minimum Occupancy - 90% physical / 85% economic for the 90 day period leading up to closing.

Interest Only - Available.

Accrual - 30/360 and Actual/360

Maximum LTV - 80%

Minimum DSCR - 1.25

Rate Lock - 30 to 180 day locks available at application, with a streamlined rate lock option.

Prepayment Options - Yield maintenance or a declining (step-down) prepayment premium.

Recourse - Non-Recourse available with “bad boy” carve-outs.

Eligible Properties: Traditional 5+ unit multifamily properties, Multifamily Affordable Housing (MAH) properties, cooperative properties, condo properties without fractured ownership, townhomes, and duplexes. Mixed-use properties with no more than 35% commercial rentable space accounting for no greater than 20% of effective gross. Manufactured housing communities (MHCs) with 50+ pad sites.

Eligible Borrowers: Must have a net worth equal to the loan amount and liquid assets equal to at least 9 months of mortgage payments.

Supplemental Financing - Allowed after 12 months

Escrows - Lenders are given authority to waive the Replacement Reserve for certain transactions. Replacement Reserve, tax, and insurance escrows are usually expected for higher leverage loans.

Assumable - Yes, with lender approval and a 1% fee

Subordinate debt - Not permitted

Borrower - Single Asset Entity

Sponsor Requirements -

  • 680 or higher credit score (at the lender’s discretion)
  • The collective net worth of key principals must exceed the total loan amount
  • Minimum liquidity of at least nine months of debt service
  • Local ownership - no prior multifamily experience required
  • Absentee ownership - requires two years of comparable multifamily ownership experience

Tenant Concentration - The small loan program deems properties with a specific tenant (e.g. student, military, corporate) concentration greater than 20% as ineligible for financing. Properties with a project-based HAP contract are also ineligible under the program.

Third-Party Reports - Streamlined (using ASTM E-1528-14 protocol).

What You Need to Know About the Fannie Mae Multifamily Small Loan Program

While there are certainly other options for financing a small apartment multifamily property, the Fannie Mae Multifamily Small Loan Program stands out as a diamond in the rough. Still, the program highlights alone aren’t enough to base this conclusion on. Any borrower looking to obtain a multifamily small loan from the program should also know the less advertised details.

The Fannie Mae Multifamily Small Loan program has a few understated caveats and requirements that borrowers should consider. Most importantly, there is zero-tolerance when it comes to borrowers being able to meet the minimum requirements for net worth and liquidity. Being able to meet those stated minimums can make or break the entire deal.

The program has a minimum expenditure requirement for specific expense line items like maintenance, payroll, management, and replacement reserves. Another detail worth noting is that the quality and condition of the subject property are of high importance. A property condition inspection is required for the deal, and any discovered deficiencies must be addressed and fixed before the transaction can close.

There are some lesser-known criteria for subject properties under the small loan program as well. Properties located in seismic zones 3 & 4 with subterranean or “tuck away” parking structures require a PML report. Properties with unreinforced masonry construction, as well as properties built before 1980 that have not had seismic reinforcements or retrofits completed are generally ineligible for financing. Non-Contiguous properties are eligible with a Fannie Mae waiver.

A Fannie Mae waiver is also required for phased properties as well. Properties that belong to an HOA or are a part of a PUD are typically ineligible. Borrowers should be aware that absentee ownership of any property financed through the program requires professional management.

In addition to the facts above, here are a few more things to take into consideration when shopping for a Fannie Mae Multifamily Small Loan:

  • Even though the loans are non-recourse, key principals must sign an “exceptions to non-recourse” document, and face some liability
  • Borrowing entities and key principals must undergo rigorous lien, litigation, and bankruptcy searches.
  • There is a higher insurance expense in this type of transaction due to the higher coverage requirements in the secondary market.
  • The Fannie Mae waiver that is required for non-contiguous and phased properties is difficult to obtain.