The Most Popular Loan Program for Financing a Small Apartment Property.
The Freddie Mac Small Balance Loan (SBL) program is one of the most widely adopted apartment lending programs in the industry for smaller apartment properties. Freddie Mac has typically been thought of as the industry leader for larger multifamily loans, but when faced with a growing demand for a smaller multifamily loan, the small balance loan program was created to act as a direct competitor to Fannie Mae’s small loan program for apartment financing under the $10 million mark. Its success in the market space is a clear indication of its highly competitive and favorable loan terms compared to anything else on the market.
The small balance loan program from Freddie Mac specifically targets those in need of apartment financing between $1 million and $7.5 million. Much like the Fannie Mae Small Loan program, Small Balance Loans offer LTVs up to 80% and DSCRs as low as 1.25x. Small Balance Loans from Freddie Mac do not support fully-amortizing loan terms, but they do offer a plethora of fixed and variable rate term options between 5 and 20 years, with 30-year amortizations. Additionally, the small balance loan program has a rate lock option for early in the loan process to help reduce the risk of an unstable interest rate. For investors, generally speaking, the SBL program offers better rates and terms in the larger markets, as opposed to the Fannie Mae Small Loan program, which typically offers the best terms in smaller markets.
Why Choose the Small Balance Loan?
There are simply too few reasons not to choose a Freddie Mac small balance loan for financing a multifamily property within the $1 million to $7.5 million range. The highly competitive nature of the SBL is its major selling point. The small balance loan program offers an impressive selection of assumable, non-recourse loan options, an interest-only option, up to 80% LTV, and even declining prepayment options.
When choosing a loan from the SBL program, borrowers can find flexibility nearly unmatched in the multifamily market space. There are a total of six different hybrid ARM and Fixed rate loan structures to consider, as well as the interest-only option mentioned earlier. Though none of these options are fully amortizing, there are 30-year amortization schedules available within the program.
It is also worth mentioning that the borrower costs that typically plague small balance loans have been addressed by Freddie Mac. Normally, the third party costs and fees that generally don’t change regardless of how big or small the loan amount is can cause the fixed origination cost of a $1 million dollar loan to be eerily similar to the costs of a $10 million dollar loan. Freddie Mac’s small balance loan program offers a much more streamlined loan process, with greatly compressed costs that create a noticeable difference to borrowers.
The streamlined application process for the small balance loan is another major benefit of choosing the program for apartment financing. Borrowers with credit scores of 650 and above are eligible for the SBL (without the need to provide tax returns, no less), and can take comfort in rate locks that can span anywhere between 60-120 days. The small balance loan can be utilized for both acquisitions as well as refinances.
What you should know about the Freddie Mac Small Balance loan
Before moving on the small balance loan, there are a few things that would be beneficial for a potential borrower or investor to know about the program. While it is easy to find an overview of the loan terms usually associated with the SBL, there are a few details about the program that are not as commonly talked about. For example, each and every small balance loan must be reviewed and approved by Freddie Mac, which is something that even Fannie Mae does not do for loans of this nature.
While the small balance loan is available to borrowers and investors nationwide, the program operates by region. The SBL program divides the nation into regions, with unique interest rates available in each. There are 5 regions in total which are the Northeast, Southeast, North Central, South Central, and finally the western region. Though the difference between the interest rates in each region is minuscule, It is still something beneficial to take into consideration when shopping for a small balance loan.
Another unique trait of Freddie Mac’s small balance loans is that unlike most other secondary market programs, the available fixed interest rate is not tied to a SWAP or Treasury. Instead, the program favors using a coupon bond to base their interest rates on. This is unique even among the other Freddie Mac multifamily loan offerings.
Should a borrower go through with an SBL application, there are a few more things to keep in mind.
- The quality and condition of a given asset are important to the small balance loan program.
- In most cases across the country, Freddie Mac will send one of their regional managers to perform a site inspection of the subject property.
- For non-local owners, professional third party management is a requirement for eligibility.
- Lender legal is a requirement for every small balance loan
- Borrowers and in most cases any key principals must undergo various bankruptcy, lien, and litigation searches.
- In major markets, there is no underwriting interest rate floor, which translates to higher loan values
Freddie Mac Small Balance Loan Guidelines
- Loan Size - Small balance loans can range anywhere between $1 million and $7.5 million. Loans between $6 million and $7.5 million are only available in top and standard markets and reserved only for properties with 100 or fewer units.
Eligible Properties - Multifamily properties with 5+ units. There are no restricted markets, however, eligibility for properties in higher risk submarkets varies.
- Eligibility for non-contiguous properties depends on them being operated as one single property, with each property meeting the minimum occupancy requirements, LTV, and DSCR.
- Mixed-Use residential commercial properties are eligible only if the gross rents and gross rentable square feet are less than 40% of the total gross
- LURA and HAP contract properties can be eligible, but the decision is typically up to the lender.
- Ineligible Properties - Usually, a property that hosts a high concentration (at least 25%) of tenants that fall into a specific category such as elderly, military, or student. However, when that specific population is still under 50%, exceptions can still be made at the lender’s discretion.
Borrowing Entity - a single asset entity is required (no prior multifamily experience necessary)
- Exceptions can be made for Trusts and Corporations
- Eligibility can be extended to Tenants in Common (TIC) if each tenant is a single asset entity, and there are no more than 5 co-tenants
Sponsor Requirements -
- A credit score of 650 or higher
- The total net worth of all key principals must exceed the loan amount
Non-local owners must have a minimum of 1-year multifamily ownership experience
- Non Local owners with strong mitigates may see an exception in top, standard, or small markets.
- Foreign nationals must have prior multifamily ownership experience, and 2x the program’s required minimum net worth/liquidity.
Principals That Require Underwriting -
- All managers of the borrowing entity
- Any general partners of the borrower
- Any member or limited partner with no less than a 25% interest in the borrower
- North Central
- South Central
Markets - The SBL program recognizes each county as one of 4 different market tiers based on census data portraying the size of the rental population.
- Top - largest rental population
- Standard - the average rental population
- Small - Less than average rental population
- Very Small - the smallest available market tier
Fixed-Rate Terms -
- 5 year Fixed
- 7 year fixed
- 10 year fixed
ARM Terms - The SBL program includes 3 hybrid ARM products that use the 6 month LIBOR index. These Hybrid ARMs have a lifetime cap set at 500 basis points higher than the original rate and 1% periodic rate adjustments that occur at 6 month intervals. ARM terms include:
- 5 year fixed / 15 year ARM
- 7 year fixed / 13 year ARM
- 10 year fixed / 10 year ARM
- Amortization - 30 years
Interest Only Option -
- Full term for loans with an LTV less than 65%, and a DSCR greater than 1.4
- 1 year for the 5 year fixed term
- 2 years for the 7 year fixed term
- 3 years for the 10 year fixed term
- DSCR Requirements - A minimum in the range of 1.2 - 1.4 depending on the market tier.
- Maximum LTV - Between 75% and 80% depending on the market tier
- Occupancy - 85% Minimum
Prepayment Penalty - The SBL program offers declining prepay options (which can be reduced with a rate increase) or yield maintenance.
- For a 5 year fixed term: 5,4,3,2,1.
- For a 7 year fixed term: 5,5,4,4,3,2,1.
- For a 10 year fixed term: 5,5,4,4,3,3,2,2,1,1.
1% prepay during ARM term
- Can be waived if selling the property
- Can be waived when refinancing with Freddie Mac
- Guarantee - Non-Recourse with standard “bad boy” carve-outs.
- Insurance escrow deferred
- Replacement reserves deferred
- Real estate tax escrow deferred for loans with an LTV of 65% or less
- Replacement Reserves - Not Required
- Rate Lock - Available for 60 -120 days at the time of application
- Assumability - allowed with a 1% assumption fee and lender approval
Freddie Mac Small Balance Loan Prepayment Terms
Aiming to meet their promise of more flexible loan terms that best meet the needs of their customers, the Freddie Mac SBL program provides an array of different prepayment options to choose from. With the SBL program, borrowers can choose between yield maintenance and three different declining prepayment options. The prepayment schedules are as follows:
Yield Maintenance Prepayment Term - Interest rate adjustment. There are no adjustments to the interest rate.
- 5-year fixed term: 5-years
- 7-year fixed term: 7-years
- 10-year fixed term: 10-years
Declining Prepayment Term - Interest rate adjustment. Add 15 bps for 5-year fixed term and 20 bps for 7-year and 10-year fixed terms.
- 5-year fixed term: 5-4-3-2-1
- 7-year fixed term: 5-5-4-4-3-2-1
- 10-year fixed term: 5-5-4-4-3-3-2-2-1-1
Declining Prepayment Term Option 1 - Interest rate adjustment. Add 35 bps for 5-year fixed term and 40 bps for 7-year and 10-year fixed terms.
- 5-year fixed term: 3-2-1-1-1
- 7-year fixed term: 3-3-2-2-1-1-1
- 10-year fixed term: 3-3-3-2-2-2-1-1-1-1
Reduced Declining Prepayment Term Option 2 - Interest rate adjustment. Add 45 bps for 5-year fixed term.
- 5-year fixed term: 3-1-0
- 7-year fixed term: None
- 10-year fixed term: None
Freddie Mac Small Balance Loan Market Tiers
Under Freddie Mac’s SBL program, the nation is divided into five regions comprised of the Northeast, Southeast, Western, North Central, and South Central. Those five regions each have their own unique interest rates and are further split into markets. There are 4 defined “tiers” of markets in the small balance loan program.
Freddie Mac has given each and every county in the United States a market tier designation. A county can be designated as either a Top, Standard, Small, or Very Small market. The designation is based on the size of the rental population, as determined by the U.S. Census Bureau.
When comparing your loan options for apartment financing it's important to understand how the Freddie Mac small balance loan market tiers affect loan terms. Subject properties that are located in Top and Standard market tiers qualify for more aggressive loan terms than those located in the Small and Very Small tiers. Normally, subject properties in Small and Very Small markets will have slightly higher interest rates, higher DSCR, lower LTV, and fewer years of interest-only payments.
Because of this, properties located in the Small and Very Small market tiers may qualify for more competitive terms through the Fannie Mae Multifamily Loan Program. This is only due to the fact that rates and terms are typically unaffected by the size of the market with Fannie Mae. Still, the Freddie Mac small balance loan is the go-to choice for most borrowers.
For more information on how a property’s region and market tier will affect small balance loan terms, please contact us here at Apartment.Loans for a risk-free consultation with one of our multifamily loan specialists.
Freddie Mac SBL Market Tiers Defined:
- Top Markets: Certain (but not all) counties in the following MSA’s: Miami, New York, Los Angeles, Chicago, Washington D.C., San Francisco, Boston, Seattle, San Diego, Denver, Portland, Minneapolis, San Jose and Stamford.
- Standard Markets: Greater than 60k rental population which includes most MSA’s of significant size.
- Small Markets: Rental population between 30k and 60k
- Very Small Markets: Rental population under 30k.
Leverage / DSCR:
- Top Markets: Max LTV 80% for purchases, 80% for refinances, 1.20x DSCR minimum.
- Standard Markets: Max LTV 80% for purchases, 80% for refinances, 1.25x DSCR minimum.
- Small Markets: Max LTV 75% for purchases, 70% for refinances, 1.30x DSCR minimum.
- Very Small Markets: Max LTV 75% for purchases, 70% for refinances, 1.40x DSCR minimum.
Freddie Mac Small Balance Loan Linked Program
The SBL program offers limited apartment financing for non-contiguous subject properties through its Linked Property Program. Only properties in Top and Standard market tiers are eligible for the linked program. Each property must have no less than 5 units, and there must be a minimum of 10 total units.
In addition to the requirements above, there is a $2 million minimum loan size that must be met. The subject properties must also be within 3 miles walking distance of at least one other subject property, and share similar or comparable characteristics such as rent amount, construction type, and unit configuration. Borrowers must be aware that all subject properties must be owned in or by a single asset entity.
Freddie Mac Optigo and the Small Balance Loan Program
For borrowers interested in the small balance loan program that Freddie Mac offers, there are a few ways to go about getting one. One of the more notable methods of getting an SBL that fits the unique needs of each borrower is through Freddie Mac Optigo. Optigo is a Freddie Mac rebranding of its multifamily seller/servicer network and selection of loan offerings. Through the Optigo network, finding flexible financing terms for a small balance loan is as simple as finding a Freddie Mac approved lender, or simply reaching out to us for a free consultation.