Freddie Mac SBL Terms, Qualifications, and Guidelines Terms, Qualifications, and Guidelines
Multifamily and apartment buildings with 5+ units are generally eligible for the Freddie Mac Optigo SBL program. Ineligible properties include:
- Properties with a 50% higher concentration of student or military housing
- Age-restricted communities, including skilled nursing, independent living, assisted living, intermediate care, memory care, and other similar types of seniors housing developments. However, some independent living communities may be eligible, provided they do not provide services to residents.
- Section 8 Housing Assistance Payment properties, as well as properties with other project-based housing assistance contracts
- Certain properties funded with Historic Tax Credits (HTCs) (specifically those with a master lease structure)
- Properties funded with tax-exempt bonds
- Low-Income Housing Tax Credit (LIHTC) properties with Land Use Restrictive Agreements (LURAs) in compliance years 1-12
Commercial Space Limitation
Commercial and/or retail space must not exceed 25% of a property’s gross income.
Borrowers generally should be for-profit, Single Asset Entities (SAEs), but there is some flexibility. No nonprofit entities are allowed. Loans under $6 million may also be offered to individuals (U.S. citizens only), Special Purpose Entities (SPEs), limited partnerships (LPs), limited liability companies (LLCs), trusts (irrevocable trusts and revocable trusts with an individual guarantor), and tenancies in common (must have no more than 5 unrelated members). Loans over $6 million must be Single Asset Entities. Additionally, principals need to have a combined net worth of at least 100% of the loan amount (not including retirement accounts), and post-closing liquidity equal to at least 9 months of principal and interest financing. Good credit is also needed, generally 650+.
The Freddie Mac SBL program does not permit funds to be used for property renovations or rehabilitation. Investors wishing to obtain Freddie Mac rehabilitation financing may wish to apply for a Freddie Mac Value-Add Loan or a Freddie Mac Moderate Rehab Loan instead of the SBL program.
Maximum Loan Amount
The maximum loan amount for the SBL program is $7.5 million, while the minimum is $750,000. All loans are constrained by LTV and DSCR requirements, which vary based on the market in which the property is located. Loans between $750,000 and $1 million, as well as loans above $6 million are subject to additional restrictions.
Leverage is the concept of using borrowed capital in order to purchase an investment. Leverage is generally limited by lenders in order to limit their risk. Freddie Mac Small Balance Loans offer leverage up to:
- 80% LTV for purchases and refinances
- 1.20x DSCR for hybrid ARM and fixed-rate loans, 1.35x DSCR for full-term interest-only loans
- 80% LTV for purchases and refinances, 65% LTV for full-term interest-only loans
- 1.25x DSCR for hybrid ARM and fixed-rate loans, 1.40x DSCR for full-term interest-only loans
- 75% LTV for purchases and 70% LTV for refinances, 60% for full-term interest-only loans
- 1.30x DSCR for hybrid ARM and fixed-rate loans, 1.40x for full-term interest-only loans
Very Small Markets:
- 75% for purchases and 70% for refinances, 60% for full-term interest-only loans
- 1.40x DSCR for hybrid ARM and fixed-rate loans, 1.50x for full-term interest-only loans
Escrowed funds are held by a third party throughout the duration of te loan transaction, and typically include:
- Insurance escrows required, can often be deferred
- Replacement reserve escrows are required, can also generally be deferred
- Escrows required for property taxes, but are generally deferred for properties utliizing leverage of less than 65%
It’s important to realize that escrow requirements are issued on a deal-to-deal basis, so reserves can often be waived entirely.
Costs and Fees
To apply for the Optigo SBL program, borrowers must pay a fee of $4,500 for properties located in Top Markets and $8,500 for properties located in Standard Markets. Additionally, borrowers must pay for several third-party reports, including a Freddie Mac Multifamily Appraisal, a Phase 1 Environmental Site Assessment (ESA), and an Engineering Report.
Term & Amortization
Hybrid ARM loans have 20-year terms with a 5, 7, or 10-year fixed rate period, and floating interest rates for the remaining period of the loan (caps and floors included). Fixed-rate loans have 5, 7, or 10-year terms. Full-term interest-only loans are also available. Partial interest-only is available as well. All Freddie Mac Small Balance Loans have 30-year amortizations.
Interest rates vary based on market fluctuations, but, as of April 2019, interest rates vary from 4.51% to 5.25% for Hybrid ARM loans, and between 4.78% to 5.30% for fixed-rate loans.
Prepayment penalties vary based on loan terms and are generally structured as step downs or soft step downs. Specific penalties include:
Hybrid ARM Loans:
5-Year Fixed/15-Year Floating: 5, 4, 3, 2, 1
7-Year Fixed/13-Year Floating: 5, 5, 4, 4, 3, 2, 1
10-Year Fixed/10-Year Floating: 5, 5, 4, 4, 3, 3, 2, 2, 1, 1
Prepayment penalties remain at 1% for the entire floating rate period of the loan.
5-Year Fixed: 5, 4, 3, 2, 1
7-Year Fixed: 5, 5, 4, 4, 3, 2, 1
10-Year Fixed: 5, 5, 4, 4, 3, 3, 2, 2, 1, 1
If a Small Balance Loan is assumed by a new borrower, all prepayment penalties are waived. In addition, borrowers can opt for a “graduated alternative” that reduces the severity of the prepayment penalty, for an additional interest rate hike.
Alternate Prepayment Penalties
5-Year Term: 4.5 YM Prepayment
7-Year Term: 6.5 YM Prepayment
10-Year Term: 9.5 YM Prepayment
Soft Step Down Prepayment:
5-Year Fixed: 3, 2, 1, 1, 1
7-Year Fixed: 3, 3, 2, 2, 1, 1, 1
10-Year Fixed: 3, 3, 3, 2, 2, 2, 1, 1, 1, 1
Modified Step Down:
5-Year Fixed: 3, 1, 0, 0, 0
All Freddie Mac SBL loans are non-recourse, subject to standard “bad-boy” carve-outs for fraud, material misrepresentation, and other “bad acts”.
Freddie Mac SBL financing is fully assumable with approval and a 1% fee.
Freddie Mac requires borrowers to have sufficient replacement reserves to cover property repairs and other unexpected expenses. Exact amounts will be determined by a property’s physical needs assessment (PNA), but amounts typically vary between $200 and $300 per unit, per year. For example, a 15-unit property would generally need to set aside $3,000 to $4,500 for replacement reserves on an annual basis. Reserves are assessed on a transaction by transaction basis.
Borrowers must apply for the SBL program with a Freddie Mac SBL-approved lender. Borrowers may achieve an even faster process by choosing a lender aligned with Freddie Mac’s new Optigo seller/servicer network.
Freddie Mac multifamily loans, such as the Small Balance Loan, can close in as little as 45 to 60 days. However, this depends on an individual lender a borrower is working with, as well as the speed at which a borrower complies and submits third-party reports and other required documentation.