Refinancing a Bank Loan Into Agency Debt
The trade you are making when you swap a recourse bank loan for a Fannie Mae or Freddie Mac loan, line by line.
Moving from a recourse bank loan to Fannie Mae or Freddie Mac debt usually removes your personal guaranty of the balance, lengthens the fixed-rate term and amortization, and drops bank covenants. In exchange you fund tax, insurance and replacement reserve escrows, accept a stricter prepayment structure, sign standard bad-boy carve-out guaranties, and report financials to a servicer. The building must be stabilized and the sponsor must meet net worth and liquidity tests.
The short version
A typical community bank apartment loan is a five-year balloon with a personal guaranty, a 25- or 30-year amortization, annual covenant tests and a deposit relationship. An agency loan from Fannie Mae or Freddie Mac, made through an approved lender, is usually non-recourse, can be fixed for much longer, and is sold or securitized rather than held on a bank's balance sheet. Almost every difference between the two follows from that last point: the agency loan has to fit a standard box because investors are buying it.
For a stabilized building with clean books, the move is usually worth making. For a building in transition, or an owner who expects to sell in two years, it often is not.
What changes, line by line
| Term | Typical bank loan | Agency loan (Fannie Mae or Freddie Mac) |
|---|---|---|
| Recourse | Full or partial personal guaranty of the balance | Non-recourse for the balance, with carve-out guaranties |
| Fixed-rate term | Commonly 3 to 7 years, then reprice or balloon | Fannie Mae Small Loans offer terms from 5 to 30 years |
| Covenants | Annual DSCR test, sometimes global cash flow, deposit requirements | Sized at closing; generally no annual DSCR maintenance test |
| Escrows | Often waived for strong relationship borrowers | Real estate tax and insurance escrows are standard |
| Replacement reserves | Rare | Monthly deposit set by the property condition report |
| Prepayment | Step-down or none | Yield maintenance, a declining premium, or defeasance |
| Reporting | Annual statements and tax returns to your banker | Periodic operating statements and rent rolls to a servicer |
| Borrower | Your existing LLC is usually fine | Often a single-asset entity with organizational limits |
| Assumption | Usually not allowed | Usually allowed with lender approval and a fee |
Terms in the bank column vary widely by bank. The agency column describes standard executions; every term sheet should be read against your own documents.
Recourse and carve-outs
Non-recourse means that if the property fails and the lender forecloses, it cannot pursue you personally for a shortfall on the balance. That protection has conditions. You or your guarantor will sign a carve-out guaranty that makes you personally liable for losses caused by specific acts (fraud, misapplied rents or insurance proceeds, waste, unpermitted transfers or additional debt, and environmental problems), and that can make the whole loan recourse on triggers like a voluntary bankruptcy filing. Read bad-boy carve-outs before you sign, and have your attorney review the guaranty itself.
Reserves and escrows
Expect to fund an initial deposit for taxes and insurance at closing and to pay one-twelfth of each with every monthly payment. The property condition report sets a replacement reserve, a monthly deposit held for capital items like roofs and boilers that you draw against with receipts. If the report finds immediate repairs, the lender will hold a repair escrow, often more than the estimated cost, until the work is done. These deposits are your money, but they reduce the cash you take home from the refinance. Our closing cost estimator has lines for each.
Prepayment
This is where owners get hurt. A bank loan with a 3-2-1 step-down is cheap to leave. An agency loan with yield maintenance can be expensive to leave if rates fall, and defeasance takes weeks and a consultant. If there is a real chance you sell or refinance before maturity, ask for a declining-premium option and price it against yield maintenance. The prepayment penalty guide covers how each is calculated.
Reporting
The servicer will ask for operating statements and rent rolls on a schedule set in your loan agreement, and for an annual statement. Late or missing reports can be a covenant default. If you self-manage on a spreadsheet, set up a clean monthly close before you apply, because the lender will underwrite from the same statements.
Who qualifies
Agency lenders size the property and test the sponsor. The property side:
- Stabilized occupancy sustained over a recent period. A building mid-renovation or mid-lease-up usually needs a bridge loan first.
- Debt service coverage and leverage within program limits. Freddie Mac Conventional Small, for $2 million to $10 million loans on properties of 50 units or fewer, sizes to a minimum 1.25x DSCR and up to 80% LTV. Fannie Mae Small Loans go up to $9 million. Cash-out refinances are often held to lower leverage than rate-and-term refinances.
- Physical condition that passes a property condition report and a Phase I environmental site assessment.
- Clean operating history, typically a trailing-12 operating statement and a current rent roll the lender can tie to bank deposits.
The sponsor side: lenders test net worth and liquidity against the loan, and check credit, real estate experience and background. The specific thresholds vary by lender and execution, so ask each lender for its test before you apply. Run your numbers through the eligibility checker to see which program criteria you pass.
The sizing surprise
Your bank sized your loan on its own terms, sometimes on your global cash flow rather than the property alone. An agency lender underwrites only the building, on its own NOI. It applies a vacancy floor, a management fee floor and a replacement reserve, and it trends taxes and insurance. The underwritten NOI is often lower than the NOI on your statement, and the loan size follows. Run the T-12 underwriting calculator before you assume the agency loan pays off the bank. If it does not, the low-DSCR guide covers the options.
What it costs to make the move
Agency refinances carry more third-party work than a bank renewal. Budget for:
- A lender or origination fee, and in some cases a broker fee.
- An appraisal, a property condition report and a Phase I environmental site assessment, all ordered by the lender.
- Lender's legal fees, which you pay, plus your own counsel.
- Title insurance, a survey or survey update, and recording costs.
- A good-faith or rate-lock deposit, usually credited at closing.
- Initial escrow and reserve deposits.
- Any exit cost on the bank loan.
Many of these are paid before you know you will close, so ask each lender which costs are refundable. The closing costs guide walks through each line.
Timing the move
Start before the bank loan matures, not after. Agency loans take longer to close than a bank renewal because of third-party reports and the lender's credit process, and a bank that knows you are leaving has little reason to extend on easy terms. Work back from your maturity date with the maturity planner. If your bank loan floats, compare the cost of carrying it a few more months against locking a fixed agency rate now.
Frequently asked questions
Is an agency loan really non-recourse?
For the loan balance, generally yes: if the property fails, the lender's recovery is the property. But you or a guarantor sign a carve-out guaranty covering losses from specific acts such as fraud, misapplied rents, unpermitted transfers or environmental problems, and certain triggers such as a voluntary bankruptcy can make the full loan recourse. Have an attorney review the guaranty before closing.
Will an agency lender lend as much as my bank did?
Not always. An agency lender sizes only on the property's underwritten NOI, applying vacancy and management fee floors, replacement reserves and trended taxes and insurance. It ignores your other income and deposits. If your bank sized on a global relationship, the agency loan may come in lower. Run your trailing-12 through the lender's adjustments before you give the bank notice.
Can I refinance a bank loan into a Fannie Mae loan if I only have a 6-unit building?
Fannie Mae and Freddie Mac multifamily programs cover properties with five or more units, and Fannie Mae Small Loans go up to $9 million. Very small loans can be harder to place with agency lenders because their fixed costs are similar to larger loans. Freddie Mac Conventional Small starts at $2 million. Below agency minimums, banks, credit unions and other lenders are the usual options.
What escrows does an agency loan require that my bank did not?
Expect monthly escrows for real estate taxes and insurance, a monthly replacement reserve deposit sized from the property condition report, and a repair escrow if the report identifies needed work. These are held by the servicer and released for their purpose. They reduce the net cash you receive from the refinance, so include them when you size the deal.
What do I lose by leaving my bank?
Mainly flexibility. A bank can renew, modify or waive terms on a phone call, often has a light prepayment structure, and may lend on relationship strength. Agency debt is standardized, so changes, partial releases and early payoff follow the documents and can cost more. You also gain things: longer fixed terms, no personal guaranty of the balance and no annual covenant test.
Related
- Apartment RefinanceHow to refinance a 5+ unit apartment building: agency, HUD 223(f), bank, CMBS, life company and bridge loans, how…
- Fannie Small Loans vs Bank LoansFannie Mae Small Loans (up to $9M, 80% LTV, 1.25x, non-recourse) vs a bank apartment loan: recourse, term,…
- Refinance RequirementsPublished requirements to refinance a 5+ unit apartment building with Fannie Mae, Freddie Mac or HUD 223(f): units,…
- Prepayment PenaltiesYield maintenance, defeasance, step-down and open windows on apartment loans: how each is computed, how to get the…
- Refinance Closing CostsEach closing cost on an apartment building refinance, who charges it and what drives it, with HUD 223(f) and Freddie…