Small and Very Small Markets for Freddie Mac Small Balance Loans
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The underwriting process for the Freddie Mac Small Balance Loan program divides cities across the country into Top Markets, Standard Markets, Small Markets, and Very Small Markets. Top Markets consist of the largest MSAs in the United States and therefore pose the least risk for Freddie Mac. In contrast, Small and Very Small Markets are composed of the smallest MSAs in the U.S. and are significantly riskier from an underwriting standpoint.
All cities and areas that are not specifically identified as Top Markets or Standard Markets are either classified as Small or Very Small Markets. Small Markets require that properties have a minimum debt service coverage ratio of 1.30x, while Very Small Markets require a minimum DSCR of 1.40x. Market tiers for the Freddie Mac SBL program were adjusted significantly in 2016, when nearly 50 Standard Markets were re-listed as Small Markets, in order to improve underwriting parameters and leverage for borrowers in the remaining Standard Markets. A full list of SBL Market Tiers can be found here.
Related Questions
What are the advantages of investing in small and very small markets for Freddie Mac Small Balance Loans?
The advantages of investing in small and very small markets for Freddie Mac Small Balance Loans include:
- Lower interest rates for borrowers in the program's top markets, like New York City or Los Angeles.
- Flexible loan options with a variety of term lengths and amortization periods.
- Loans are assumable with approval and 1% fee.
- 60-120 day rate locks typically available.
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What are the risks associated with investing in small and very small markets for Freddie Mac Small Balance Loans?
The risks associated with investing in small and very small markets for Freddie Mac Small Balance Loans are higher than those associated with investing in Top Markets or Standard Markets. Small and Very Small Markets are composed of the smallest MSAs in the U.S. and are significantly riskier from an underwriting standpoint. Small Markets require that properties have a minimum debt service coverage ratio of 1.30x, while Very Small Markets require a minimum DSCR of 1.40x. Additionally, properties in Top Markets must have DSCR of at least 1.20x.
Sources: Small and Very Small Markets for Freddie Mac Small Balance Loans, Top Markets for Freddie Mac Small Balance Loans, Freddie Mac Small Balance Loans
What are the eligibility requirements for Freddie Mac Small Balance Loans?
The eligibility requirements for Freddie Mac Small Balance Loans vary depending on the size of the loan. For loans between $750,000 and $1 million, the loan must be in a Top Market or Standard Market, and the borrower must meet additional requirements such as having previous Freddie Mac Multifamily experience, taking out multiple loans simultaneously, or having significant multifamily experience in the area. For loans between $6 million and $7.5 million, the loan must be in a Top or Standard Market, have no more than 100 units, and 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).
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.
What are the benefits of investing in Freddie Mac Small Balance Loans?
The Freddie Mac Small Balance Loan program offers a great degree of flexibility for borrowers, as they offer fixed-rate, floating-rate, and interest-only loan options with a variety of term lengths and amortization periods. Additionally, they allow up to 80% LTV allowance, have a streamlined application process, are non-recourse, offer interest-only options, have 30-year amortizations, and are assumable with approval and 1% fee. Furthermore, 60-120 day rate locks are typically available. Source
What are the best strategies for investing in small and very small markets for Freddie Mac Small Balance Loans?
The best strategies for investing in small and very small markets for Freddie Mac Small Balance Loans are to ensure that the property has a high Debt Service Coverage Ratio (DSCR) and to be aware of the different interest rates for each region. Properties in Small and Very Small Markets require a DSCR of at least 1.20x, and the interest rates for these markets are slightly higher than for Top Markets. It is also important to be aware of the different regions that Freddie Mac has divided the U.S. into for the purpose of the SBL program, as each region has slightly different interest rates.
For more information, please see the following sources: