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Fannie Mae Multifamily Loans – The Perfect Introduction

May 19, 2020

Many investors take a keen interest in the multifamily real estate market. Multifamily properties have five or more rental units. The Federal National Mortgage Association (Fannie Mae) is the largest player in the multifamily finance segment. In this article, we’ll introduce the role Fannie Mae plays financing multifamily properties, including the latest guidelines and Fannie Mae multifamily loan rates.

What are Fannie Mae Multifamily Loans?

Fannie Mae multifamily loans are loan guarantees, made chiefly through the Delegate Underwriting and Servicing (DUS) program. Under this program, 25 DUS lenders underwrite one-third of the risk on every Fannie Mae multifamily loan. The lenders make, close, deliver, and service loans that meet Fannie Mae multifamily guidelines.
Over 90% of the Fannie Mae multifamily financing covers workforce housing for families at or below120% of the Area Media Income.

Other Fannie Mae Programs

In addition to the DUS program, Fannie Mae also operates the following multifamily programs:
• Multifamily Small Loan Program: This is a program with lower costs, competitive pricing, limited third-party reports, and reduced documentation.
• Affordable Housing Loan Program: Provides long-term fixed-rate debt for stabilized properties with income restrictions or regulated rents.
• Student Housing Loan Program: For multifamily properties specialized for students. The properties must lease at least 80% of the units to students, both undergraduates and graduates.
• Specialty Property Types: Multifamily loans for military housing, cooperative apartments, and manufactured community housing.
• Seniors Housing Loan Program: Mortgages for stabilized seniors housing properties, including independent living, assisted living, and Alzheimer/dementia care.
• Manufactured Community Housing Program: Offers aggressive rates for eligible manufactured housing communities and mobile home parks. Mostly limited to four- and five-start properties.
Fannie Mae Multifamily Loan Guidelines and Rates
The guidelines vary by Fannie Mae program. Here is a summary of the Fannie Mae multifamily loan guidelines for each program. Unless otherwise noted, interest rates on 30-year loans are below 4.5%.
Fannie Mae Multifamily DUS Program
Eligible properties:
• Condos
• Co-op
• Properties with no more than 80% tenant concentration
• Residential/commercial mixed-use
• Section 8 (tenant based)
• Stabilized 5+ unit multifamily
• Town homes
Ineligible properties:
• Condos with fractured ownership structure
• HAP contract
• Phased properties require a waiver, construction, substantial rehab/renovation, duplex, or town home properties that are non-contiguous
• Properties belonging to an HOA
• Properties with a healthcare component
Sponsor requirements:
• 680 minimum credit score with some flexibility
• Absentee ownership must demonstrate at least two years similar multifamily ownership experience, some exceptions available
• Local ownership doesn’t require prior multifamily ownership experience

Amortization 30 years, balloon
Borrower Bankruptcy remote, single purpose single asset U.S. entity
Credit facilities $25 million or higher
Current Rate Below 4.5% for 30-year loan
Impounds Tax and insurance
Interest accrual Actual/360 or 30/360
Interest only Available
Loan size $3 million+
Loan term 5 to 30 years
Maximum loan-to-value ratio 80%
Mezzanine financing Available
Minimum debt service coverage ratio 1.25
Minimum occupancy 85% physical/80% economic
Prepayment penalty Greater of 1% or yield maintenance
Rate locks Yes, six months from commitment
Rate type Fixed or convertible floating
Recourse/non-recourse Non-recourse with carveouts
Replacement reserves required? Yes
Subordinate debt permitted? No
Supplemental loan 12 months from closing date

Fannie Mae Multifamily Small Loan Program

Eligible properties:
• 5+ unit traditional apartment complexes
• Condo properties without fractured ownership
• Town home
• Duplexes.
• Mixed-use properties with up to 35% rentable commercial space with no greater than 20% off effective gross
• Scattered site properties may require Fannie Mae approval
Sponsor requirements:
• Minimum credit score 680
• Combined net worth of key principals must be greater than loan amount
• Liquidity of nine months debt service, minimum
• Local ownership
• No previous multifamily experience needed
• Absentee ownership must demonstrate at least two years similar multifamily ownership experience
Amortization 30 years, balloon
Borrower Single purpose single asset entity
Current rate Below 4.5% for 30-year loan
Finance closing costs Up to 3%
Impounds Tax and insurance on higher leveraged loans
Interest accrual Actual/360 or 30/360
Interest only Available
Loan size $750,000 – $5 million
Loan term Up to 30 years, assumable
Maximum loan-to-value ratio 80%
Minimum debt service coverage ratio 1.25
Minimum required occupancy 90% physical/85% economic
Nationwide availability Available
Prepayment penalty Greater of 1% or yield maintenance
Rate type Fixed or floating
Recourse/non-recourse Non-recourse with carve-outs
Replacement reserves required? On higher leveraged loans
Subordinate debt permitted? No
Supplemental Loan Must wait 12 months from closing

Fannie Mae Affordable Housing Loan Program
Eligible properties types include:
• Section 8 HAP contracts
• Expiring Low-Income Housing Tax Credits
• Refinancing of tax exempt-bonds
• Properties with existing RD 515 and RD 538 loans
• Loans insured under Section 202 and 236 of National Housing Act
Income qualifying restrictions:
• 20% or more units rented to households earning at or below 50% of Area Median Income (AMI), or
• 40% or more units rented to households earning at or below 60% of AMI

Sponsor requirements:
• 680 minimum credit score with some flexibility
• Sponsor should either have professional third-party management with the required experience or have experience with income/rent restricted properties
• Absentee ownership must have at least two years similar multifamily ownership experience

Borrower Bankruptcy remote, single purpose single asset U.S. entity
Current rate Below 4.5% for 30-year loan
Impounds Tax and insurance
Loan size $1 million+
Loan term Up to 30 years, assumable w/ landlord permission
Maximum loan-to-value ratio 80%
Minimum debt service coverage ratio 1.15
Minimum required occupancy 85% physical/80% economic
Nationwide availability Available
Prepayment penalty Greater of 1% or yield maintenance
Rate lock Up to six months after commitment
Rate type Fixed or floating
Recourse/non-recourse Non-recourse for most loans, carve-outs
Restabilization reserve At least six months debt service.
Underwritten NOI Minimum expense for specific line items

Fannie Mae Student Housing Loan Program
Eligible properties:
• Cannot offer food service nor stand on university-owned land
• Properties, usually have undergraduate or graduate students making up at least 80% residency that serve for student housing, or constructed as conventional multifamily housing functioning solely as student housing
• Provide 12-month leases, preferably with parental guaranties
• Stabilized properties with a student tenant base that are not easily convertible to conventional multifamily housing
• Typically, eligible properties are close (two-mile radius) to a university or college with at least 10,000 students enrolled, mostly as full-time
Borrower Bankruptcy remote, single purpose single asset U.S. entity
Current rate Below 4.5% for 30-year loan
Impounds Tax and insurance
Loan size $1 million+
Loan term Up to 30 years, assumable w/ landlord permission
Maximum loan-to-value ratio 75%
Minimum debt service coverage ratio 1.30
Minimum required occupancy N/A
Nationwide availability Available
Prepayment penalty Greater of 1% or yield maintenance
Rate lock Up to six months after commitment
Rate type Fixed
Recourse/non-recourse Non-recourse for most loans, carve-outs
Replacement reserves required? Yes
Sponsor requirements Strong operators with track record
Subordinate debt permitted? No
Underwritten NOI Minimum expense for specific line items

Fannie Mae Seniors Housing Loan Program
Eligible properties:
• Assisted living
• Assisted living with Alzheimer’s
• Independent living
• Properties must meet the housing needs of seniors and must have a sprinkler system
Sponsor/operator requirements:
• Must have at least five years senior housing industry experience
• Must have experience with at least five stabilized properties
Standard third-party reports:
• Appraisal
• Consultant’s Report on Operations and Management
• Phase I Environmental Assessment
• Physical Needs Assessment
• Regulatory Compliance Report for licensed seniors housing properties

Amortization 30 years
Current rate Below 4.5% for 30-year loan
Impounds Tax and insurance
Interest accrual Actual/360 or 30/360
Loan size $2 million+
Loan term 30 years, assumable with lender approval
Maximum loan-to-value ratio 75%
Minimum debt service coverage ratio 1.30 – 1.45
Nationwide availability Available
Prepayment penalty Greater of 1% or yield maintenance
Rate type Fixed
Recourse/non-recourse Mostly non-recourse with carve-outs
Replacement reserves required? Yes

Fannie Mae Manufactured Community Housing Loan Program
Eligible properties:
• Stabilized, professionally managed, high quality, mobile home parks, or manufactured housing communities having at least 50 pad sites (waivers available for parks with fewer pads)
• Amenities not required but preferred
• At least 75% tenant owned homes
• Concealed hitches and jackposts
• Conformance to appropriate Manufactured Housing HUD Code standards
• Mostly four and five-star ratings
• Leases can’t provide the option to buy pad sites
• Off-street parking
• Park must have pavement
• Preference for greater than 50% double-wide homes
• Skirted homes

Amortization 30 years
Current Rate Below 4.5% for 30-year loan
Impounds Tax and insurance
Interest accrual Actual/360 or 30/360
Interest only Available
Loan size $1 million+
Loan term 5 – 30 years
Maximum loan-to-value ratio 75% – 80%
Minimum debt service coverage ratio 1.25
Minimum occupancy 85%
Prepayment penalty Greater of 1% or yield maintenance
Rate locks Yes, six months from commitment
Rate type Fixed
Recourse/non-recourse Non-recourse with carveouts
Replacement reserves required? Yes, $25 per pad-year, waiver available
Supplemental loan 12 months from closing date

Fannie Mae Military Housing Loans
Eligible properties:
• Stabilized 5+ unit multifamily properties having a military tenant concentration exceeding 20%.
Amortization 30 years
Borrower Bankruptcy remote, single purpose single asset U.S. entity
Current rate Below 4.5% for 30-year loan
Impounds Tax and insurance
Loan size $1 million+
Loan term Fixed and floating rate options
Maximum loan-to-value ratio 75%
Minimum debt service coverage ratio 1.30
Minimum required occupancy 85% physical/80% economic
Nationwide availability Select markets
Prepayment penalty Greater of 1% or yield maintenance
Rate type Fixed
Recourse/non-recourse Non-recourse for most loans, carve-outs
Replacement reserves required? Yes
Supplemental loan 12 months from closing date

Fannie Mae Multifamily Cooperative/Condo Loan Program
Eligible properties:
• Stabilized co-op properties in eligible co-op property markets
• Co-op corporations with strong operating history and solid financial management
• Co-op must achieve a balanced budget by charging sufficient maintenance fees
• Limited equity co-ops for low and moderate-income households might be eligible
• Normally, the sponsor may own no more than 40% of the units
• Property management company must demonstrate experience with co-op properties of similar market and size
• Required reserve balance not less than 10% of yearly maintenance fees
• The three-year average of maintenance fee accounts receivable divided by the total annual maintenance fees cannot be greater than 3%
Amortization 30 years
Current rate Below 4.5% for 30-year loan
Interest accrual Actual/360 or 30/360
Loan size $1 million+
Loan term 5 – 30 years
Maximum loan-to-value ratio 55%
Minimum debt service coverage ratio 1.00 (actual operations) or 1.55 (market rents)
Nationwide availability Select markets
Prepayment penalty Greater of 1% or yield maintenance
Rate type Fixed. Interest-only also available
Rate lock Six months from closing.
Recourse/non-recourse Non-recourse for most loans, carve-outs
Replacement reserves required? Yes
Supplemental loan 12 months from closing date

Important Forms and Documents

Fannie Mae requires many forms for its DUS program. Some of these documents are not necessary for the Small Loan program.

Core Loan Documents

All of these documents and forms are mandatory:
• Assignment of Collateral Agreements
• Assignment of Security Instrument
• Environmental Indemnity Agreement
• Multifamily Mortgage Loan and Security Agreement
• Multifamily Note endorsed to Fannie Mae
• Multifamily Security Instrument
• Opinion of Borrower’s Counsel on Origination of Mortgage Loan
• UCC Financing Statements and Assignments of UCC Financing Statements with Schedule A
The following are mandatory for fixed-rate loans or adjustable rate loans:
• Prepayment Premium Schedule
• Schedule 1 to Multifamily Loan and Security Agreement – Definitions Schedule
• Schedule 2 to Multifamily Loan and Security Agreement – Summary of Loan Terms.
• Schedule 3 to Multifamily Loan and Security Agreement – Schedule of Interest Rate Type Provisions
• Schedule 4 to Multifamily Loan and Security Agreement
The following are mandatory when converting to a fixed rate loan:
• Amendment to Mortgage Loan and Security Agreement (Conversion to Fixed Rate)
• Opinion(s) of Borrower’s Counsel on Origination of Mortgage Loan
• Amendment to Security Instrument
The following documents may be mandatory:
• Assignment of Management Agreement
• Guaranty of Non-Recourse Obligations
• Payment Guaranty
There are additional forms required for:
• 1031 exchanges
• Condominiums
• Cooperative properties
• Cross-default and cross-collateralization
• Defeasance
• FHA Risk-Sharing Mortgage Loans
• Green Mortgage Loans
• Ground leases
• HAP contracts
• Healthy Housing Rewards
• Hybrid adjustable-rate loans.
• Manufactured housing
• Master leases
• Mezzanine loan financing
• Miscellaneous loan documents
• Phased properties
• Preferred equity
• Quarterly financial reporting waiver (for Small Mortgage loans)
• Recourse loans
• Refinance loans
• Senior housing
• Streamlined rate lock loans
• Structured adjustable-rate loans
• Supplemental loans
• Tax-credit properties
• Tenants in common
You can retrieve these and other forms from the Fannie Mae website.

Video:  Multifamily Explainer:  The DUS Model

Is a Fannie Mae Multifamily Loan Right for Me?

Fannie Mae multifamily loans are immensely popular, but they aren’t necessarily right for every situation. Here are some points to consider.

Right for You

A Fannie Mae multifamily loan might be right for you if:
• Your needs match up to one of the various Fannie Mae multifamily loan programs.
• You are looking for a reasonably low-interest rate.
• You are pursuing affordable housing financing, perhaps paired with a Low-Income Housing Tax Credit.
• The property was a HUD legacy program but converted to Section 8 housing via the Rental Assistance Demonstration program.
• You require a relatively small loan because you like the streamlined paperwork.
• You have relatively good credit.
• You bring a net worth exceeding the loan amount.
• You have post-closing liquidity (not counting retirement accounts or loan proceeds) exceeding 10% of the loan amount.
• You meet the agency’s experience requirements.
• You want the option for step-down prepayment penalties.
• You like the modest fees and legal costs.
Wrong for You
Other types of loans may be better fit if you fall into one of these categories:
• You don’t meet Fannie Mae’s liquidity and/or net worth requirements.
• You require a deal that falls outside the relatively rigid rules from Fannie Mae.
• You prefer to use CMBS lenders.
• You need a loan fast. Fannie Mae loans are notoriously slow and drown you in red tape.
• You don’t mind a defeasance prepayment penalty.
• You don’t have the necessary replacement reserves.
• You haven’t met the occupancy requirements.
• You don’t want to pay more than $20,000 to apply for the loan.
• You will be an absentee owner but don’t want to hire a third-party manager.
• You require subordinate debt.
• You are seeking to recapitalize your loan with the FHA.
• You prefer a life company loan because you don’t need high leverage or long amortizations. These loans have aggressive interest rates. They are best suited for loans in the $2 million to $15 million range rather than larger Class A infill-type products.
• You want smaller prepayment penalties and closing costs, often available from bank loans.
• You prefer risk-adjusted pricing that allows you increase leverage and reduce execution risk.

How the Process Works
Although there are many documents to complete, the actual process has just a few main steps:
1. Contact a lender authorized to make Fannie Mae multifamily loans.
2. Discuss the various programs available and study the term sheets of each one that interests you.
3. See if you prequalify for a Fannie Mae multifamily loan. You’ll have to submit the following:
a. Current Rent Roll/Occupancy Report (with move-in and lease-end dates)
b. Interior/Exterior Photos of the Property (or property website)
c. Personal Financial Statement (including a schedule of real estate owned)
d. Real Estate Resume (if you don’t currently own multifamily properties)
e. Trailing 12 Month Operating Statement
4. If you decide to apply, make a due diligence deposit (typically up to $15,000) to pay for:
a. Appraisal
b. Environmental engineering report
c. Structural engineering report
d. Zoning report
e. All lender and agency inspections
f. Title search
5. Submit all the required forms.
6. If you receive approval, schedule the closing. It usually takes about 45 to 60 days to close on a Fannie Mae multifamily loan.
7. Prepare for the closing, where you’ll likely spend up to another $10,000 or more on the following:
a. Legal costs
b. Securitization costs
c. Origination fees
8. Close on the loan.
How Assets America® Can Help
Fannie Mae is not the right answer for many multifamily projects. As discussed above, there are a lot of reasons to seek an alternative lender. We are Assets America® and we arrange real estate loans beginning at $5 million. If you need a multifamily loan, contact us for an in-depth review of what we can offer. We can move faster and with less red tape, so contact us today.
Frequently Asked Questions
What is the origination fee on Fannie Mae multifamily loans?
Typically, the origination fee on a Fannie Mae multifamily loan is at least 1%. Application fees may exceed $20,000, and there are more closing costs as well. The lender sets the origination fee.
What can I change on the Fannie Mae documents?
Naturally, you can fix any incorrect information you put on a Fannie Mae document. In addition, you may want to change some of the loan terms, such as fixed vs adjustable rate, loan term, and loan amount.
Does Freddie Mac own my loan?
Typically, Freddie Mac would not own a Fannie Mae loan. You can go onto the Freddie Mac website and use its self-service loan look-up tool. Normally, the sponsor will be pool and securitize your loan.
What aspects of the loan can you negotiate?
You may be able to negotiate the prepayment penalty aspects of your loan. In addition, you may be able to demonstrate you have the required experience even if it’s a marginal call. Your lender will let you know which items are negotiable and which aren’t.

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