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Apartment Loans Secrets
1 min read
by Content Team

Freddie Mac Small Balance Loan Prepayment Penalties

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Prepayment Penalties in Relation to the Freddie Mac Optigo SBL Program

Prepayment penalties are designed to compensate a lender when a borrower decides to pay off their loan early, as the lender will be losing a significant amount of money in future interest payments. Prepayment penalties can be structured in a variety of different ways, but are usually larger at the beginning of the term of a loan, and grow smaller over time. All Freddie Mac Multifamily loans carry prepayment penalties, but each loan has slightly different parameters. In regards to the Freddie Mac Small Balance Loan program, borrowers can choose between yield maintenance or a step-down prepayment penalty. Yield maintenance reimburses a lender (or the investors, after a loan has been securitized) for the amount of interest that will not be paid by the borrower as a result of prepayment, while a step-down prepayment penalty charges borrowers a percentage of the unpaid principal balance (UPB), which “steps down” by a certain amount each year.

Related Questions

What are the Freddie Mac Small Balance Loan prepayment penalties?

The Freddie Mac Small Balance Loan 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.

Term Prepayment Penalty
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.

Term Prepayment Penalty
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.

Term Prepayment Penalty
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.

Term Prepayment Penalty
5-year fixed term 3-1-0
7-year fixed term None
10-year fixed term None

It’s important to understand that there are several additional rules that govern prepayment penalties. For instance, the “Option 4” for 5-year fixed and hybrid ARM loans is only available for loans financing properties in Top Markets. And, in addition, borrowers paying yield maintenance may need to pay additional fees, depending on the exact circumstances.

What are the benefits of a Freddie Mac Small Balance Loan?

The Benefits of Freddie Mac Small Balance Loans include:

  • 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)

What are the requirements for a Freddie Mac Small Balance Loan?

The requirements for a Freddie Mac Small Balance Loan depend on the size of the loan. For loans under $1 million, additional requirements include:

  • Loans 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)
    • 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%
  • 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 and $7.5 million, additional requirements include:

  • Loans must be in a Top or Standard Market
  • No more than 100 units
  • Borrowers must order additional third-party reports, including a survey report and a zoning report
  • Minimum DSCR of 1.25x
  • Borrowers must form a Single Asset Entity (SAE)

Advantages 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

What are the advantages of a Freddie Mac Small Balance Loan?

The advantages of 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)

How do I apply for a Freddie Mac Small Balance Loan?

To apply for a Freddie Mac Small Balance Loan, you will need to contact a Freddie Mac approved lender. The lender will then review your application and submit it to Freddie Mac for approval. The lender will also provide you with the necessary documents and information needed to complete the application process. Once approved, the lender will provide you with the loan terms and conditions.

For more information on the application process, please visit this page.

In this article:
  1. Prepayment Penalties in Relation to the Freddie Mac Optigo SBL Program
  2. Related Questions
  3. Get Financing
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  • freddie-mac-multifamily-loans
  • freddie-mac-sbl
  • glossary
  • freddie-mac-multifamily
  • freddie-mac-optigo
  • freddie-mac-sbl
  • freddie-mac-small-balance-loans
  • multifamily-financing
  • multifamily-loans
  • multifamily-prepayment-penalties
  • prepayment-penalties

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