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Anatomy of a MF Agency Loan

This article focuses on multifamily Agency loans. It provides you with an understanding of how these loans work and takes you through the process of applying for an Agency loan. While the emphasis is on Freddie Mac, the Fannie Mae process is similar, as is HUD and FHA, which both also cover multifamily loans.

Agency Loans – Background

Fannie Mae and Freddie Mac are both government-backed agencies that provide risk mitigation for residential mortgages, including single-family and multi-family housing. While their structure and procedures differ, both rely on third party lenders as the loan originators and underwriters of the loan. Because these loans are purchased by the Agency and/or resold to entities that then “securitize” the loans, they must conform to certain standards with regard to the riskiness of the transaction.

Often perceived of as “A-paper” lenders, Fannie Mae and Freddie Mac loans are accessible to multifamily investors with B+ and even B credit profiles. In fact, by working with a private lending source that is an approved Agency lender, the multifamily investor can find not only great loan terms, but an easy and fast close on their transaction, often within 30 days of application.

One of the most  attractive features is that Agency loans can be amortized for up to 30 years, making loan payments very affordable. Some Agencies, such as HUD, also include construction and/or renovation that can roll into the permanent financing.

Freddie Mac Loan Qualification

There are both qualifications and pricing in any loan program. To qualify for the loan, the borrower must been certain basic parameters in the loan profile.  For Freddie Mac, basic loan parameters toqualify for this program are:

  • Eligible Properties: Conventional multifamily housing with five residential units or more
  • Loan Size: $1 MM to $50+ MM
  • LTV: 80% maximum
  • DSCR: minimum 1.25 in Standard Markets
  • Occupancy: Property must be stabilized at 90% physical occupancy for the trailing 3-month average
  • Eligible Borrowers: Individuals; limited partnerships; limited liability companies; Single Asset Entities (SAE); Borrowing Entities Special Purpose Entities (SPE); tenancy-in-common (TIC) with up to five unrelated members; and Trusts (irrevocable trusts and revocable trusts with a warm body guarantor)
  • Recourse: Non-recourse with standard carve-out provisions required
  • Net Worth & Liquidity: Net worth equal to the loan amount. Liquidity equal to 9 months of principal and interest

Freddie Mac Loan Pricing

The pricing of a loan is primarily the interest rate, which is the cost of money. The pricing depends on a number of factors, including:

  • The location of the property (Tier I, Standard Market, Small Market, or Very Small Market)
  • The type of loan product the borrower desires (fixed rate or hybrid fixed/floating)
  • Length of term to rate adjustment (5-year, 7-year or 10-year)
  • Loan to Value
  • Debt Service Coverage Ratio

Rate Adjustments may be made for other factors as well, with credits given in some areas, and deductions in others. Typical FM rates as of January 31, 2017 are in the range of 3.64% (in top tier markets with a 5-year balloon and up to 80% LTV) to 5.19% in a Very Small Market with a 10-year fixed rate and up to 75% LTV. As you can see, Agency rates are quite low when compared to other multifamily options.

Initial Package

The initial package is used by the lender to determine if the borrower and the property meet the qualifications of the loan program, and to begin pricing the loan based on the data provided.  While the list may seem intimidating, the commercial borrower should generally be prepared for this type of documentation of both the property’s performance, which is primary, and of their own financial strength.

  1. Purchase price/Estimate Value
  2. Loan request amount
  3. Current rent roll
  4. 2 years of historical statements
  5. Monthly T-12 income/expenses
  6. Borrower name/Personal Financial Statement/SREO
  7. Sponsor Name
  8. Property Address
  9. Verification that the sponsor has liquidity => 9 months of loan payments
  10. Verification that the sponsor has a NW => loan amount
  11. Verification that the sponsor has a credit score greater than 650
  12. Information on the sponsor’s multifamily experience (if available)
  13. Whether or not the sponsor is a US Citizen (we can lend to foreign nationals but the liquidity and NW tests are higher)

Loan Application and Underwriting

It’s actually pretty simple after the initial package is reviewed and accepted. The lender issues an LOI or Conditional Approval, requests additional documentation to support the initial package, orders an appraisal and environmental assessment, and moves through the underwriting process to complete the analysis of the deal.

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By |February 15th, 2017|Commercial Mortgage Refinance, Private Commercial Lending|Comments Off on Anatomy of a MF Agency Loan
Barbara Leuin, Commercial Lending Expert
Barbara Leuin, Ph.D., Commercial Lending Expert, Colorado Springs, CO, is a serial entrepreneur and real estate investor, with over 30 years of professional experience, including 13 years of university teaching in business and economics; 16 years of business consulting; and 5 years as a full-time real estate investor. Since 1996, she has helped start-up businesses access millions in private capital. As CEO, Barbara brings visionary leadership, team-building and leadership to Sofia Capital Ventures. She is responsible for lender relationships, broker training and identifying market opportunities.

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