Interest-Only Freddie Mac Small Balance Loans
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Interest-only (I/O) loans consist of payments of only interest and not principal. These loans are not amortizing, and do not decrease the unpaid principal balance (UPB) of a loan. Therefore, any equity gains during the term of an interest-only loan will occur as the result of property appreciation. I/O loans can be extremely beneficial to property investors, as they greatly increase cash flow and DSCR.
In addition to full-term interest-only financing, some loans offer shorter, interest-only periods, usually at the beginning of the term of a loan. This is the case for Freddie Mac Small Balance Loans, as they generally offer either, 1, 2, or 3-year I/O periods. The SBL program also offers full-term interest-only loans, though these loans have stricter LTV and DSCR requirements.
Related Questions
What are the benefits of an interest-only Freddie Mac Small Balance Loan?
The Freddie Mac Small Balance Loan (SBL) program offers a variety of benefits for borrowers who opt for an interest-only loan. These benefits include:
- Reduced monthly mortgage payments, increasing cash flow
- Ability to use savings to invest in other commercial properties or other profitable, non-real estate investments
- Up to 80% LTV allowance
- Streamlined application process
- Non-recourse loans
- 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
In addition to full-term interest-only financing, some loans offer shorter, interest-only periods, usually at the beginning of the term of a loan. This is the case for the SBL program, as they generally offer either, 1, 2, or 3-year I/O periods. The SBL program also offers full-term interest-only loans, though these loans have stricter LTV and DSCR requirements.
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What are the requirements for an interest-only Freddie Mac Small Balance Loan?
The requirements for an interest-only Freddie Mac Small Balance Loan are:
- Loan Amount: $1 million minimum, $7.5 million maximum
- Loan Uses: Acquisitions or refinances
- Loan Terms: 20-year hybrid ARM with initial 5, 7, or 10-year fixed-rate period, OR 5, 7, or 10-year fixed-rate loan
- Amortization: Up to 30 years, partial interest-only options available, full-term interest-only options may also be available in certain circumstances.
- Interest Rates: Vary, but lower for properties in Top and Standard Markets and higher for properties in Small and Very Small Markets
- Credit: Borrowers for the Optigo Small Balance Loan program will usually need to have a FICO credit score of at least 650.
- Capacity: Varies between 1.20x (for amortizing loans in Top Markets) to 1.50x (for full-term interest-only loans in Small Markets).
- Collateral: Since Small Balance Loans are non-recourse, the property itself is generally considered to be sufficient collateral for the loan.
What are the advantages of an interest-only Freddie Mac Small Balance Loan compared to other financing options?
The advantages of an interest-only Freddie Mac Small Balance Loan compared to other financing options include:
- Significantly reduced monthly mortgage payments, increasing cash flow
- Ability to use savings to invest in other commercial properties or other profitable, non-real estate investments
- Interest-only loans are generally available for 1, 2, or 3-year periods
- Full-term interest-only loans are available, though they have stricter LTV and DSCR requirements
For more information, please visit https://www.multifamily.loans/freddie-mac-small-balance-apartment-loans and https://apartment.loans/posts/interest-only-loans.
What are the risks associated with an interest-only Freddie Mac Small Balance Loan?
The main risk associated with an interest-only Freddie Mac Small Balance Loan is that the loan does not amortize, and thus does not decrease the unpaid principal balance (UPB) of the loan. This means that any equity gains during the term of the loan will only occur as the result of property appreciation. Additionally, full-term interest-only loans have stricter LTV and DSCR requirements than loans with shorter, interest-only periods.
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How long does it take to get approved for an interest-only Freddie Mac Small Balance Loan?
It typically takes between 30-45 days to get approved for an interest-only Freddie Mac Small Balance Loan. The streamlined application process makes it easier to get approved quickly. According to Apartment Loans, nearly all Small Balance Loans come with a standard interest-only period at the beginning of the loan, which is based upon the loan’s fixed-rate period. For 5-year fixed rate loans and 5/15 hybrid ARMs, the I/O period is 1 year, for 7-year fixed rate loans and 7/13 hybrid ARMs, the I/O period is 2 years, and for 10-year fixed rate loans and 10/10 hybrid ARMs, the I/O period is 3 years. However, for properties in Small and Very Small Markets, partial term I/O loans are only available for loans with 7-year fixed-rate periods (1 year I/O period) and loans with 10-year fixed rate periods (2-year I/O period).