Fannie Mae Multifamily Mortgages

The Fannie Mae Multifamily Loan Program is one of the most utilized funding resources for apartment owners nationwide because of its attractive interest rates, variety of loan structure options, high loan-to-values, and non-recourse guaranty structure. With both fixed and floating rate options available, it is a great product for most multifamily property types, including affordable housing, senior independent living, student housing, cooperative housing, traditional market rate apartments, and manufactured housing. It can also be used for mixed-use buildings where the other commercial units make up 20% or less of the gross income. For those looking to compare the current Fannie Mae Multifamily interest rates to other multifamily products, it can be done on our apartment interest rates page.

Fannie Mae Multifamily Programs

Fannie offers both fixed and variable products for all property types and can go nationwide, although primary and large secondary markets are preferred (i.e. MSA populations of at least 200,000). There are 2 major FNMA programs under which the majority of the products fall:

Standard DUS Mortgage: The Standard DUS product is for the purchase or refinance of existing, stabilized properties with 5+ units that have a minimum loan amount of $5 million (or $7 million in eligible markets*).

Small Loan Program: The Small Loans product is for the purchase or refinance of existing, stabilized properties with 5-50 units and loan amounts between $750,000 - $5 million ($7 million in eligible markets*).

* Eligible markets are Baltimore, Boston, Chicago, Los Angeles, New York, Sacramento, San Diego, San Francisco, San Jose, Seattle, Washington D.C.

General Loan Features

1: Loan terms range from 5-30 years with amortizations up to 30 years (depending on the type, location, and condition of the collateral). Unless the loan is “self-amortizing”, it will “balloon” at the end of the term, meaning at the loan balance will need to either be refinanced or paid off; if the loan is self-amortizing, the term and amortization match and the loan will be fully paid off when the loan matures, so there is no loan balance to pay off (unless the loan is prepaid before it matures).
2: The maximum LTV is 75% for refinances and 80% for purchases, but the required DSCR parameters for that tier must also be met. LTV may be cut by the funding lender if the condition of the property is not up to par, the useful life of the property is less than 30 years because of its age, or if the property is in a very small or Pre-Review” market.
3: The DSCR may be underwritten to 1.2x for some properties in large markets with low capitalization rates (i.e. high values in relation to the underwritten cash flow).
4: Yield Maintenance: The goal of Yield Maintenance is to allow the bond investors to maintain the same yield as if the borrower made all scheduled mortgage payments until maturity. The penalty is typically calculated by a formula contained in the Note of the Loan Documents. The language will vary between different institutions, but will typically have the same two amounts to be repaid, namely: 1) The loan’s unpaid principal balance and 2) a prepayment penalty, which is typically determined by calculating the difference between the loan’s interest rate and the replacement rate (based on the US Treasury rate that most closely corresponds to the maturity date), with the remaining loan payments discounted back for the time value of money. One thing to keep in mind is that yield maintenance provisions contain a prepayment penalty “floor” of at least 1%. Declining (Step-Down) Prepayment Penalty: A declining prepayment penalty may be structured in a variety of ways, but always has the same feature of the prepayment penalty lessening by 1% per step with the last 3-12 (or more) months open to prepay or refinance without penalty. These are usually offered on shorter-term mortgages (i.e. 5-10 years), but could potentially be offered on longer terms as well. An example of a 5 and 10 year declining prepayment penalty would be the following: 5 Year Declining: 5% of loan amount if prepaid in the first year, 4% if prepaid in the second year, 3% if prepaid in the third year, 2% if prepaid in the fourth year, and 1% if prepaid in the fifth year, also represented as 5-4-3-2-1% or 5% declining. 10 Year Declining: 5% of loan amount if prepaid in the first or second year, 4% if prepaid in the third or fourth year, 3% if prepaid in the fifth or sixth year, 2% if prepaid in the seventh or eighth year, and 1% if prepaid in the ninth or final year, also represented as 5-5-4-4-3-3-2-2-1-1% or 5% declining. 5: Fannie Mae Multifamily mortgages are assumable for a 1% fee, but the new assuming borrower (i.e. Purchaser) must qualified by meeting the original underwriting standards. Typically this occurs when the Borrower wants to sell the commercial real estate that secures the loan, and the Purchaser of the property wants to take the loan over. Once the property sale and assumption is completed, the Purchaser becomes the owner of the property and is bound by the original terms of the assumed loan and the original Borrower/Seller is released from its obligation to the property and the existing loan. The benefit of this structure is that the assumption of the loan allows the Borrower/Seller to avoid yield maintenance or other pre-payment costs and give the buyer the opportunity to assume a loan that may have favorable terms than what is market. Loan assumption is an especially attractive option in high interest rate environments or tight credit environments.
5: Fannie Mae Multifamily mortgages are assumable for a 1% fee, but the new assuming borrower (i.e. Purchaser) must qualified by meeting the original underwriting standards. Typically this occurs when the Borrower wants to sell the commercial real estate that secures the loan, and the Purchaser of the property wants to take the loan over. Once the property sale and assumption is completed, the Purchaser becomes the owner of the property and is bound by the original terms of the assumed loan and the original Borrower/Seller is released from its obligation to the property and the existing loan. The benefit of this structure is that the assumption of the loan allows the Borrower/Seller to avoid yield maintenance or other pre-payment costs and give the buyer the opportunity to assume a loan that may have favorable terms than what is market. Loan assumption is an especially attractive option in high interest rate environments or tight credit environments.
6: FNMA has an early rate lock feature which is available with a good faith deposit, allowing the borrower to lock a rate 30 to 180 days in advance of closing. Otherwise the rate will lock 1-2 days before closing. Typically, most lenders will not execute an early rate lock unless they have previously underwritten the borrowers and are comfortable with them or after the loan is approved but more time is needed to close.
7: The Fannie Mae lender or a third party may service the mortgages. The Master Servicer is responsible for day-to-day loan servicing practices including collecting loan payments, managing escrow accounts, analyzing financial statements inspecting collateral and reviewing borrower consent requests. All non-performing mortgages are usually sent to the special servicer. The special servicer is responsible for preforming customary work-out related duties including extending maturity dates, restructuring mortgages, appointing receivers, foreclosing the lender’s interest in a secured property, managing the foreclosed real estate and selling the real estate. Under some situations, master servicers subcontract some of their responsibilities to a primary or sub servicer in order to uphold the servicing standard when they need additional assistance.

Underwriting Requirements

Loan Pricing

Fannie Mae loans are priced based on the corresponding treasury and a spread, which takes into account the loan amount, term, LTV, and property location. Pricing considerations the borrower should be aware of are the following:

• Usually the longer the term, the higher the rate
• There is a 3-tier pricing structure based on LTV and DSCR, which have approximately a 0.2% rate change between each tier.
  • Tier 2: 66-80% LTV (purchase) or 75% LTV (refinance); minimum DSCR of 1.25
  • Tier 3: 56-65% LTV; minimum DSCR of 1.35x
  • Tier 4: 55% LTV or below; minimum DSCR of 1.55x
• Discounts are given to properties with affordable rents
• Discounts are given to properties in primary MSAs
• Discounts are given to properties with loan amounts above $2 million
• Discounts are given to properties with 5-50 units
• Premiums are put on properties in tertiary markets (if approved)
• Amortizations can be shorter on older properties or properties in tertiary markets
• Tier 3 & 4 loans may qualify for interest-only loans (with a small increase in interest rate)
• Declining prepayment penalties add additional spread to the rate
• Rate discounts or additional proceeds are available for “Green” properties

Current Fannie Mae Multifamily Interest Rates

Getting a Fannie Mae Multifamily Quote

In order to get a Fannie Mae rate quote and formal application, plan on submitting the following documents*:

• Trailing 12 Month Operating Statement
• Current Rent Roll/Occupancy Report (with move-in and lease-end dates)
• Interior/Exterior Photos of the Property (or property website)
• Personal Financial Statement (including a schedule of real estate owned)
• Real Estate Resume (if borrower doesn’t currently own multifamily properties)

Pre-Closing / Due Diligence Process

The Fannie Mae process is very similar to the CMBS and Freddie Mac loan application processes since the mortgages are also pooled together and sold as bonds to investors. Because of this, there is usually a little more paperwork, longer loan documents, and more third party report requirements than a conventional mortgage, but the process isn’t prohibitive and well worth it for the right investor. Loans typically close 45-60 days after the application and deposit have been furnished to the lender. The due diligence deposit is approximately $8,500-$10,000 for small loans and $15,000 for DUS, which covers the appraisal, environmental engineering report, structural engineering report, zoning report, and all lender and agency inspections, but doesn’t include the legal costs for closing and securitizing the loan (which is typically another $6,000-$12,000) as well as any origination fee. Assuming no additional reporting or legal work is required, borrowers can expect to spend about $15,000 for small balance loans and $25,000 for DUS loans (exclusive of title, escrow, or any doc stamp taxes). The diligence items required to close the loan usually include the following:

Borrower Documents

• Borrowing Entity Credit Authorization Form
• Borrowing Entity Financial Statement (within 12 months of commitment date)
• Borrowing Entity Liquidity Verification (prior (2) months bank/investment statements)
• Borrowing Entity Property Questionnaire
• Borrowing Entity Schedule of Real Estate
• Borrowing Entity Organizational Chart (with management structure and ownership percentages)
• Borrowing Entity Organizational Documents

Key Principal/Carve-Out Guarantor Documents

• Contingent Liabilities Statement
• Key Principal(s) Credit Authorization Form(s)
• Key Principal(s) Financial Statement (within 12 months of commitment date)
• Key Principal(s) Liquidity Verification (2 months bank/investment statements for each KP)
• Key Principal(s) Questionnaire
• Key Principal(s) Resume
• Key Principal(s) Schedule of Real Estate
• Key Principal Entity(s) Organizational Documents

Principal/Sponsor (Non-Guarantor) Documents

• Principal(s) Financial Statement (within 12 months of commitment date)
• Principal(s) Credit Authorization Form(s)
• Principal(s) Schedule of Real Estate
• Principal(s) Liquidity Verification (2 months bank/investment statements for each principal)
• Principal Entity(s) Organizational Documents

Property-Related Dcouments

• Capital Improvements Schedule (completed in the last 3 years); include description, quantity and cost
• Insurance Authorization Form
• Trailing 12 month Operating Statement, including all income (rental, laundry, parking) and all expense details. Plan on sending monthly operating statements up to and including the month of closing.
• Year-to-Date & Prior 3 years Operating Statements; statements should include all income: rental, laundry, parking and all other expense details. Please continue to send monthly operating statements up to and including the month of closing.
• Pro-forma/Budget (for the next 12 months)
• Purchase and Sale Agreement (if an acquisition or purchased within the last 2 years)
• Real Estate Tax Bills (past 3 years and copy of the most recent assessment notice)
• Current Rent Roll (signed, certified and dated)
• Service/Vendor Contracts (landscaping, laundry, pest, etc.)
• Survey
• Termite Report (dated within 90 days for existing properties or a bond for new construction)
• Title Insurance (Fannie Mae Compliant) Final Policy
• 1031 Exchange Documentation (if applicable)

Property Management Documents

• Standard Lease Agreement
• Management Agreement (executed)
• Management Company Resume
• Management Company Personnel List (position, part-time/full-time, current salary, rent concessions (if any), annual taxes & benefits, date of last pay increase)
• On-site Manager Resume (if applicable)
• Proposed Management Plan (any changes to current operations, and any planned capital improvements)

Additional Documentation

• Commercial Lease Agreements (cell tower, retail space, office space, etc.), if applicable. Also provide the certificate of insurance for each commercial tenant.
• Condominium Declaration/Agreement (if applicable)
• Ground Lease Agreement (if applicable)
• Rent Control/Increase Law (if applicable)
• Reciprocal Use/Easement Agreements (if applicable)
• Income/Rent Restrictions (HAP Contract, LURA, restrictions, etc.)

Closing/Securitization

Mortgages that conform to the Fannie Mae underwriting standards are funded by the originating lender, then pooled together, securitized (i.e. converted into mortgage-backed security bonds), and sold to investors. A multifamily mortgage-backed security (MBS) may be backed by fixed-rate mortgage loans or adjustable-rate mortgage loans, but not both within the same offering. When the multifamily MBS is issued, Fannie Mae guarantees timely payment of principal and interest to the MBS certificate holders. Fannie also issues Discount Mortgage-Backed Securities (DMBS), which are non-interest bearing securities having terms of one year or less and purchased at a discount. Multifamily MBS may be placed into Megas, REMICs, or other mortgage-related securities.

Loan Products by Property Type

FNMA Multifamilty Loan Documentation

FNMA Tips

• Don’t be afraid to ask questions if you don’t understand any part of the process.
• Disclose any potential credit issues up front (i.e. bankruptcy, foreclosure, short sale, liens, judgments, charge-offs, etc.) on the borrowing entity, sponsors, or sponsor holdings. You don’t want to have paid thousands of dollars in deposits only to find out later you don’t qualify for the loan because of a previous credit issue (which will come out in the legal and/or credit searches).
• Make sure you separate out any one-time or capital expenses from the rest of your NOI in your operating statements so they aren’t included in regular expenses.
• Understand that the vast majority items in the loan documents cannot be negotiated or changed because they are put there to protect the bond investors, which end up holding the loan after it is sold. In order to change anything on the loan documents, you will need Fannie Mae to sign a waiver, which could delay the loan closing 2-4 weeks.
• Get your due diligence items in quickly. It helps reduce the risk of the interest rates climbing on you while you’re waiting to close.
• If you know of properties that are comparable to yours and reflect the value that you need for your property (especially if they are recent sales), make sure to put those comparables in a list (as well as any info you have on them), and supply them to the appraiser when he comes for the site visit to assess your property. Although not guaranteed, this may help reduce some of the risk of the appraisal number coming back lower that what is needed.
• Because the standard prepayment penalty on this loan product (yield maintenance) can be very expensive if the loan is paid off too early, only choose this prepayment structure if you:
  • Are planning on paying off the loan at the time of maturity
  • Have attractive enough financing that someone will want to assume it in the future
  • Plan on prepaying/refinancing close to the maturity date

Faqs