What is a Fannie Mae Apartment Loan
Published 09-28-2018
A The Federal National Mortgage Association (FNMA or “Fannie Mae”) mortgage is an adjustable or fixed-rate loan product available for various types of multifamily properties. The underwriting and application process is standardized and performed by Delegated Underwriting and Services (DUS) lenders. Through it’s two major programs (Small Loan Program and DUS Program), Fannie offers multifamily mortgages starting at $750,000. Like CMBS mortgages, these loans are pooled, securitized, and sold to investors, but typically serviced by the originator.
Loan Features
| Recourse | Usually non-recourse except for “bad boy” carve-outs, with some exceptions |
| Interest-Only Period | Available on some adjustable-rate products |
| Prepayment Penalty | Yield Maintenance or Declining (with additional spread or fee) |
| Loan Assumption | Available, with pre-approval and assumption fee |
| Rate Lock Available | Yes, through Streamlined Rate Lock |
| Loan Servicer | Originator, or may be transferred to a third party |
| Secondary financing | Yes, 12+ months after closing, through FNMA Supplemental Loan Program |
| Insurance & Tax Reserve | Required unless low-leverage |
| Capital Reserves | Required for most properties, including older properties or properties with deferred maintenance |
Small Balance Loan Characteristics
| Eligible Properties | Market-Rate (Conventional) Apartments Cooperative Housing (in Boston, Chicago, Los Angeles, New York, Washington D.C.) |
| Loan Amount | $750,000 – $3,000,000 (nationwide) or $5,000,000 (Baltimore, Boston, Chicago, Los Angeles, New York, Sacramento, San Diego, San Francisco, San Jose, Seattle, Washington D.C.) |
| Loan Terms | 5-30 year, fixed-rate OR 7 year, adjustable rate (7/6 Program) |
| Amortization | Up to 30 years |
| Minimum DSCR | Depends on loan tier |
| Interest-Only | Part- or full-term available on fixed-rate products |
| Prepayment Penalty | Yield maintenance or Declining (for additional spread or fee) on fixed-rate terms; 1% fee (after 1 year lock-out) on adjustable terms |
| Rate Lock | Early Rate Lock available; 30-180 days |
DUS Loan Characteristics
| Eligible Properties | Market-Rate (Conventional) Apartments Cooperative Housing (in Boston, Chicago, Los Angeles, New York, Washington D.C.) |
| Loan Amount | $3,000,000+ |
| Loan Terms | 5-30 year, fixed-rate OR 7 year, adjustable rate (7/6 Program) |
| Amortization | Up to 30 years |
| Minimum DSCR | Depends on property type |
| Interest-Only | Part- or full-term on fixed-rate products |
| Prepayment Penalty | Yield maintenance or Declining (for additional spread or fee) on fixed-rate terms; 1% fee (after 1 year lock-out) on adjustable terms |
| Rate Lock | Early Rate Lock available; 30-180 days |
Property Requirements
| Property Type | Market rate apartments, affordable housing, senior housing, student housing, cooperative housing, and manufactured housing communities |
| Location | Primary or secondary MSAs (populations of 200,000+) with a few exceptions for tertiary markets |
| Occupancy | At least 90% for 90 days prior to funding for completed properties; 75% physical occupancy for newly constructed or renovated properties. |
| Units | 5+ for multifamily, 50+ pad sites for manufactured housing |
| Loan amount | $750,000 minimum, although most lenders start at $1 million |
| Financials | Strong, increasing NOI (excluding unusual expenses) |
| Leases | 12-month leases; parental guarantees for student housing |
Borrower Requirements
| Experience | Required |
| Net worth | 1.0x loan amount requested, unless waiver granted |
| Liquidity | 6-12 months debt service (after any required cash injections) |
| Credit | No recent bankruptcies, foreclosures, short sales, etc. |
| Citizenship | $750,000 minimum, although most lenders start at $1 million |
| Financials | Credit-worth single-asset US Borrower with all US ownership; indirect foreign ownership okay with proper structuring of entity and parent |
Underwriting Requirements
| Maximum LTV/LTC | 80% for purchases, 75% for refinances (dependent on cash flow) |
| Term length | 5-30 year, fixed-rate OR 7 year, adjustable rate |
| Maximum amortization | 30 years (dependent on property location and age) |
| Minimum DSCR | 1.25x+ (dependent on location and leverage) |
| Third party reports required | Appraisal, Phase I Environmental Assessment, Property Condition Assessment, Seismic report (in certain areas such as California); others may be required based on property, condition, and location |
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 1.25x» 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 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
- Declining prepayment penalties add additional spread to the rate
- Rate discounts or additional proceeds are available for “Green” properties
Funding/Securitization Process
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.
Post-Closing/Servicing
Typically serviced by the DUS originator/underwriter, but may be transferred to third parties.
Fannie Mae Apartment Loan Products
| Adjustable Rate Products | |
| Fixed Rate Products | |
| Customized Affordable Loan Products | Affordable Housing Preservation Funded Forward Rate Lock (9% LIHTC) Unfunded Forward Rate Lock (9% LIHTC) Reduced Occupancy Affordable Rehab (ROAR) MBS as Tax-Exempt Bond Collateral (Fixed Rate) MBS as Tax-Exempt Bond Collateral (Variable Rate) |
