Small Balance Loans: Fannie Mae vs Freddie Mac

Small Balance Loans: Fannie Mae vs Freddie Mac

Looking for a small loan to purchase or fund a multifamily apartment building? Then you’ve probably encountered the names Fannie Mae and Freddie Mac. While these two lenders certainly don’t have brand names that inspire images of massive, international banks, they’re actually two of the biggest lending entities in the United States.

But what are Freddie Mac and Fannie Mae? And how do they affect your ability to fund your small apartment building loans? In this post, we’ll look at the important details about Freddie Mac and Fannie Mae, their loan terms, differences, and the pros and cons of each.

What Are Fannie Mae and Freddie Mac?

Both Fannie Mae and Freddie Mac are GSEs, or government sponsored enterprises. They’re regulated by the Federal Finance Housing Agency, and as a result they’re limited by the Federal Government when it comes to the kinds of loans they’re able to offer and the borrowers to whom they’re able to lend.

In fact, the names “Fannie Mae” and “Freddie Mac” are actually nicknames—they’re officially known as the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC).

While Fannie Mae has been around since the Great Depression, when it was established as part of the New Deal in order to expand the secondary mortgage market, Freddie Mac was set up much later in the 1970s. They were both set up to help expand the market for secondary mortgages and boost the U.S. economy.

What are Small Balance Loans?

A small balance loan is a loan designed specifically for the purchase of small, multifamily housing developments to be used as investment properties through the leasing of tenants and collecting of rent. Lenders, including Fannie Mae and Freddie Mac, like to see properties that have a history of performing well and that are likely to be a dependable source of income in the future.

They also tend to look for experienced borrowers who have some level of experience that will guide them in managing their investment. As a result, these loans aren’t handed out like candy—though it’s often easier to be approved than one might assume given the $5 million+ balance of many small balance loans.

But how do Fannie Mae and Freddie Mac handle these small balance loans, and what are the primary differences between the two? Let’s find out.

Fannie Mae Small Loans

Seen as the closest counterpart to Freddie Mac, Fannie Mae has financed small loans for the last two decades. While many of the terms and conditions of their loans are similar to Freddie Mac, there are some key differences.

Fannie Mae uses a delegated model, and eligible properties include conventional multifamily developments, cooperatives in New York City, Boston, Chicago, Los Angeles, or Washington DC, and manufactured housing communities. They operate in nationwide markets and will loan up to $6 million nationwide—less than Freddie Mac’s peak figure of $7.5 million.

When it comes to loan terms, they offer 5-to-30 year fixed rate terms with part- or full-term interest only options available. Interestingly, they also offer rate lock with 30- to 180-day commitments. Borrowers are permitted to lock in a rate with Fannie Mae’s streamlined rate lock functionality.

Fannie Mae loans operate under a simple single-asset security model, which helps loan terms be more flexible and dependable when it comes to their execution. With a wide range of products, Fannie Mae is often seen as a market leader in Multifamily Small Loans.

Freddie Mac Small Loans

Freddie Mac has long been a major name when it comes to financing multifamily properties, and their approach has made them incredibly popular among property developers and real estate investors. They make an effort to make their loan process as fast and simple as possible, with the best terms available based on the market. They market themselves as providing loan products that fit the needs of their customers.

Let’s have a look at the general terms that Freddie Mac offers when it comes to financing multifamily properties with small balance loans.

Their loan amount extends up to $7.5 million, and that’s consistent across all markets. That said, they do require exception requests to be approved for deals between $6 million and $7.5 million when it comes to Small and Very Small markets.

For loan amounts less than $6 million, they place no limitations on loan amounts—meanwhile, loans between $6 million and $7.5 million are limited to 100 unites or less (with some rare exceptions).

Freddie Mac guidelines allow small balance loans for acquisition or refinance, and they offer 20-year hybrid ARM terms with initial 5, 7, or 10-year fixed-rate periods as well as 5, 7, or 10 year fixed rate loans. Amortization is set up to 30 years, and interest-only options are available for partial-term loans.

In terms of prepayment rules, declining schedules and yield maintenance are offered for all types of loans. Freddie Mac offers non-recourse with standard carve-out provisions, and subordinate debt is not permitted. Net worth must be equal to the loan amount, with liquidity equal to or greater than nine months of principal and interest.

Eligible Borrowers for Freddie Mac

Freddie Mac defines eligible borrowers as limited partnerships, limited liability companies, Single Asset Entities, and Special Purpose Entities. They can also include tenancy in common with up to five unrelated members, and trusts (either revocable trusts with a guarantor or irrevocable trusts).

Eligible Properties for Freddie Mac

Freddie Mac’s small balance loans are available for eligible properties of five residential units or more that might include:

  • Co-ops in the five boroughs of New York City and Long Island
  • Properties with tax abatements
  • Senior housing with no resident services
  • Properties with space for certain commercial uses
  • Properties with tenant-based housing vouchers
  • Low-income housing Tax Credit properties with land use restriction agreements
  • Properties with local rent subsidies for 10% or fewer units
  • Properties with certain regulatory agreements that impose income and/or rent restrictions

Some properties, it should be noted, are ineligible for Freddie Mac small balance loans—these include senior housing with resident services, student housing, military housing, properties with project-based housing assistance payment contracts, LIHTC properties with LURAs in compliance years 1-12, Historic Tax Credit properties, and tax-exempt bonds Interest Reduction Payments (IRPs).                                     

Pros and Cons of Freddie Mac and Fannie Mae

In general, Fannie Mae and Freddie Mac will offer very similar experiences when looking for small balance loans on multifamily developments. The primary difference is that Freddie Mac is likely to be more open to borrowers with less-than-perfect debt to income ratios, credit histories, and credit scores. Fannie Mae also tends to be slightly more stringent in their underwriting process than Freddie Mac. Borrowers often report that after being denied a loan with Fannie Mae, they’re able to get approved for a loan with Freddie Mac.

Freddie Mac is also more willing to find ways to work with a wider range of mortgage applications, generally adopting an attitude of positivity as they look for a way to make the process work for the borrower. They’re even willing to work with borrowers who have errors on their credit reports, errors which would otherwise disqualify them were they to go through Fannie Mae.

While small balance loans through Freddie Mac and small loans through Fannie Mae might seem the same, there are key differences that are important to discuss with your loan officer and other experts you work with along the way.

If you have questions about these two entities and the differences between their loan offerings, reach out to an expert commercial mortgage broker at Clopton Capital today.