Top 16 Things You Should Know About the Freddie Mac Multifamily Small Balance Program

1. Loan Size Restrictions

The minimum loan amount for the Freddie Mac program is $1,000,000 and the maximum is $6,000,000, except that for certain major markets, the maximum is $7,500,000.

2. Net Worth and Liquidity Requirements

Sponsors must show net worth equal to the loan amount and liquidity (i.e., cash and marketable securities) equal to 9-months of principal and interest payments, and exclusive of the funds needed for closing. For foreigners, that requirement may be increased.

3. Occupancy and Rent Seasoning

The asset must have at least 90% occupancy for the trailing 3-month average prior to underwriting. That threshold is lowered to 85% for properties that were recently built or renovated, properties that have less than 30-units, or where experienced sponsors are acquiring the property in a value-add type transaction.

4. Escrows

Taxes will be escrowed unless the LTV is less than 65%. Insurance and replacement reserves are not escrowed.

5. Local Management

If the asset is more than 100 miles from the sponsor’s residence, the sponsor must retain a local management company to manage the asset.

6. Maximum LTVs and Minimum DSCRs

In top markets, you must have a minimum of 1.20x DSCR and LTV maximum is 80%. In standard markets, it is 1.25x and 80% LTV. In small markets, the minimum DSCR is 1.30x – 1.40x, and LTV maximum is 70%. Exceptions may be applicable in certain situations.

7. Loan Programs

Freddie Mac offers 5, 7, and 10-year fixed term loans. Freddie also offers a “Hybrid ARM” program that features a 20-year term, with a fixed rate period of 5, 7, or 10, and the balance of the term is adjustable every 6-months based on changes to LIBOR. Amortizations on all programs are up to 30-years.

8. Interest Only Program

Freddie Mac offers partial or full term interest only periods. In small markets, the interest only period may be limited to 1-2 years. The max LTV is 65% for top and standard markets, and 60% for small markets. You must also add 0.15x to minimum DSCR.

9. Cash Out Is Available

In refinance transactions, the sponsor may take cash out. The amount of cash will depend on various factors, such as purchase price and purchase date, and of course the LTV and DSCR.

10. Fees & Costs

For loans less than $6 million, figure application fees of $4,500 – $8,500, depending on the market. These fees cover the lender’s due diligence, legal fees, documentation fees, etc. Also, figure a structuring fee of 50 – 100 basis points for your loan advisor to arrange the financing.

11. Prepayment Penalties (PPP)

You have a choice between a declining schedule and yield maintenance, but the prepayment penalty will be active through the life of the term of the loan.

12. Non-Recourse

Freddie Mac multifamily loans are non-recourse. The sponsor will have to sign a limited guarantee that provides standard “bad boy” carve out provisions. Bad boy acts are filing bankruptcy or damaging the property, to name a few. Essentially, this means as long as the sponsor does not commit a bad boy act, the sponsor will not have any personal liability for the loan.

13. Borrower Eligibility

For larger loans ($6 million+), the borrower must be a special purpose entity. For under $6 million loans, the borrower may be an individual, trust, or special purpose entity. If the borrower is an individual, he or she must be a U.S. Citizen. In nearly all cases, though, the owner of the asset should be a special purpose entity.

14. Eligible Properties

The property must be comprised of 5 or more units. No exceptions. Section 8 housing and other tenant-based housing voucher program assets are not permitted. Mixed use properties may be accepted if the commercial ortion of the property is less than 10% of the total property. The assets may be an assemblage of independent properties, provided that they are in close proximity to each other and owned by the same ownership entity.

15. The Top & Standard Markets

Generally speaking, the “top markets” are considered to be New York City/New Jersey metropolitan, Boston, Washington DC, Chicago, Los Angeles, San Diego, Orange County, San Francisco, San Jose, Oakland, Minneapolis, Portland, Seattle, Miami and Denver. The “standard markets” are considered to be Baltimore, Sacramento, Salt Lake City, Phoenix, Atlanta, Dallas/Ft. Worth, St. Louis, Indianapolis, Cincinnati, Albany, Bakersfield, Birmingham, Dayton, Hartford, Jacksonville, Knoxville, Louisville, Providence, Raleigh, Rochester, Richmond, Riverside, Tucson, Honolulu, Norfolk, Kansas City, Las Vegas, Philadelphia, Charlotte, Columbus, Cleveland, Oklahoma City, Pittsburgh, Memphis, Nashville, Houston, San Antonio, Austin, Richmond, Albuquerque, New Orleans, Orlando, Tampa, Detroit, Milwaukee, Tulsa, Buffalo, Omaha, and Fresno.

16. No Subordinate Debt

Generally speaking, subordinate debt is not permitted. For a purchase, this means that the sponsor needs to put in at least 20% equity and the seller or third parties may not provide secondary financing.

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