A debt service coverage ratio, or DSCR, is a measurement of an entity’s cash flow versus its debt obligations. In multifamily and commercial real estate, that entity is typically an income-producing property.

The Debt Service Coverage Ratio (DSCR) for Freddie Mac Small Balance Loans ranges from 1.20x for amortizing loans for properties in top markets, to 1.50x for interest-only loans for properties in Smaller Markets. The specific DSCR requirements for Small Balance Loans are detailed below:

Market	Hybrid ARM & Fixed-Rate Loans	Full-Term Interest-Only Financing
Top Markets	1.20x DSCR	1.35x DSCR
Standard Markets	1.25x DSCR	1.40x DSCR
Small Markets	1.30x DSCR	1.40x DSCR
Very Small Markets	1.40x DSCR	1.50x DSCR

For more information, please visit https://apartment.loans/freddie-mac-small-balance-loans/.

The Benefits of Freddie Mac Small Balance Loans include:

• Up to 80% LTV allowance
• Streamlined application process
• Loans are non-recourse
• Interest-only options
• 30-year amortizations
• Variety of hybrid ARM and fixed-rate options available
• Loans are assumable with approval and 1% fee
• 60-120 day rate locks typically available
• Flexible loan sizes, starting at just $750,000 and going up to $7.5 million
• Low interest rates, starting from just 4.51%
• High leverage, up to 80% LTV
• Generous DSCR minimums, as low as 1.20x
• 30-year amortizations, keeping payments low for borrowers
• Partial and full-term interest-only loans offered
• Cash-out refinancing offered for eligible borrowers
• Multiple fixed rate term options (with up to 10-year terms) and hybrid ARM options (with 20-year terms)
• Soft step-down prepayment penalties allowed
• 60-120 day rate commitments offered
• Loans are fully assumable with 1% fee and Freddie Mac approval
• Financing is non-recourse (with individual exceptions for certain loans)

The Freddie Mac Small Balance Loans program permits loan sizes between $750,000 and $7.5 million. For loans between $750,000 and $1 million, they must be in a Top Market or Standard Market. Eligible borrowers include previous Freddie Mac Multifamily borrowers, borrowers taking out multiple loans simultaneously, borrowers who will are likely to engage Freddie Mac for 2+ additional loans within the next 12 months, borrowers with significant multifamily experience in the area (2+ years local multifamily experience and 2+ multifamily properties owned), and loans that were initially approved for $1 million+ but were later constrained by property NOI or other factors. Properties must underwrite a vacancy of at least 5% and an expense ratio of at least 30%. Additionally, 10-15 bps will be added loans in Top Markets, while 15-20 bps will be added to loans in Standard Markets. Cash-out refinances for these loans are typically subject to stricter leverage requirements (LTV/DSCR). Seller/servicers may not market Small Balance Loans less than $1 million. Freddie Mac generally requires 3 additional business days for commitments and inspections.

For loans between $6 million to $7.5 million, they can have no more than 100 units, and will require a borrower to order additional third-party reports, including a survey report and a zoning report. Additionally, loans of more than $6 million also require a minimum DSCR of 1.25x, and require that borrowers form a Single Asset Entity (SAE).

During the underwriting process, a lender decides whether offering a loan to a borrower is a suitable risk, based on their estimated ability to repay. When examining a commercial loan application, lenders generally look at credit, capacity, and collateral-- often referred to as the “three C’s” of underwriting. In terms of credit, borrowers for the Optigo Small Balance Loan program will usually need to have a FICO credit score of at least 650. Capacity, which is defined by DSCR, varies between 1.20x (for amortizing loans in Top Markets) to 1.50x (for full-term interest-only loans in Small Markets). Since Small Balance Loans are non-recourse, the property itself is generally considered to be sufficient collateral for the loan.

The advantages of using a Freddie Mac Small Balance Loan include:

• Up to 80% LTV allowance
• Streamlined application process
• Loans are non-recourse
• Interest-only options
• 30-year amortizations
• Variety of hybrid ARM and fixed-rate options available
• Loans are assumable with approval and 1% fee
• 60-120 day rate locks typically available
• Flexible loan sizes, starting at just $750,000 and going up to $7.5 million
• Low interest rates, starting from just 4.51%
• Generous DSCR minimums, as low as 1.20x
• Partial and full-term interest-only loans offered
• Cash-out refinancing offered for eligible borrowers
• Multiple fixed rate term options (with up to 10-year terms) and hybrid ARM options (with 20-year terms)
• Soft step-down prepayment penalties allowed
• Financing is non-recourse (with individual exceptions for certain loans)

The main difference between Freddie Mac Small Balance Loans and traditional commercial real estate loans is the size of the loan. Freddie Mac Small Balance Loans are designed for smaller properties, typically those with five or fewer units. Traditional commercial real estate loans are typically for larger properties, such as office buildings, retail centers, and multifamily properties with more than five units.

Freddie Mac Small Balance Loans also have different requirements than traditional commercial real estate loans. For example, Freddie Mac Small Balance Loans have a lower credit score requirement (650+) than traditional commercial real estate loans (680+). Additionally, Freddie Mac’s SBL program has stricter background check requirements and allows up to 50% of the tenant concentration to be student or military tenants, while traditional commercial real estate loans limit this to 20%.

Other differences between Freddie Mac Small Balance Loans and traditional commercial real estate loans include:

• Freddie Mac Small Balance Loans have a maximum LTV of 80%, while traditional commercial real estate loans can have higher LTVs.
• Freddie Mac Small Balance Loans have amortization periods of up to 30 years, while traditional commercial real estate loans can have longer amortization periods.
• Freddie Mac Small Balance Loans have a non-recourse structure (with standard “bad-boy” carve-outs), while traditional commercial real estate loans may have recourse.
• Freddie Mac Small Balance Loans allow for affordability components, while traditional commercial real estate loans may not.
• Freddie Mac Small Balance Loans have limitations on income gained from commercial space, while traditional commercial real estate loans may not.
• Freddie Mac Small Balance Loans have closing costs of up to 3% of the loan amount, while traditional commercial real estate loans may have higher closing costs.
• Freddie Mac Small Balance Loans are available nationwide, while traditional commercial real estate loans may not be.
• Section 8 properties are not eligible for the Freddie Mac SBL program, while traditional commercial real estate loans may be.