If you’re new to commercial real estate investing, then understanding the loan terms is critical to making an informed decision.
The 2025 Fannie Mae Loan Term Sheet, outlines key terms for financing multifamily properties. While bankers love you use their industry jargon, there are many words that even seasons businessman have never heard of before.
We will try and breakdown each one of these, into plain simple English with explanations.
Loan Term
The term is the length of the loan, which can range from 5 to 30 years. This is the period during which you’re expected to repay the loan. For example:
- A 5-year term means you repay the loan within 5 years.
- A 30-year term spreads the repayment over a longer time, potentially lowering monthly payments but increasing total interest paid.
A 5-year term loan does not mean that you will be debt free in 5 years. It means that in 5 years you will need to find a new loan. You will need to refinance the current loan. 5 year loans come with a lower interest rate because the rate is only fixed for 5 years, but the amortization is still spread over a 30 year scale.
Loan Amortization
Amortization refers to how your loan payments are structured. With Fannie Mae loans, the maximum amortization period is 30 years.
This means your monthly payments will include a portion of both the principal (the original loan amount) and the interest over 30 years, creating predictable payment schedules.
Loan Interest Rate
You can choose between two interest rate types:
- Fixed-Rate: The interest rate stays the same throughout the loan term. Your payments are predictable and won’t change, offering stability.
- Variable-Rate: The interest rate fluctuates based on market conditions. This can lower your payments if rates drop but increase them if rates rise.
Check current interest rates for the various types of commercial property types.
Today’s Interest Rates
Maximum Loan-to-Value (LTV)
The maximum LTV is 80%. This means the loan can cover up to 80% of the property’s appraised value. You’ll need to provide the remaining 20% as a down payment. For example:
- If a property is worth $1,000,000, you can borrow up to $800,000 and must pay at least $200,000 upfront.
- If a property is worth $2,000,000, you can borrow up to $1,600,000 and must pay at least $400,000 upfront.
In general, loan to value requirements range from 60% – 80% in the commercial real estate world. If you are thinking about getting a loan at 95%, then you are confusing commercial real estate, with first time homebuyer loans.
Minimum Debt Service Coverage Ratio (DSCR)
The DSCR measures the property’s ability to generate enough income to cover loan payments. Fannie Mae requires a minimum DSCR of 1.25x. This means the property’s net operating income (NOI) must be at least 1.25 times the annual loan payment. For instance:
- If your annual loan payments will be $100,000, then the property must generate at least $125,000 in NOI.
- If your annual loan payments will be $200,000, then the property must generate at least $250,000 in NOI.
Read more about debt service coverage ratios and see our DSCR Calculator.
Property Considerations
Eligible properties must:
- Have at least 90% occupancy for at least 90 days before loan funding. This shows the property’s financial stability.
- Loans for properties still in the process of stabilizing (e.g., under construction or recently renovated) are evaluated case by case.
Supplemental Financing
Fannie Mae allows supplemental loans, which are additional loans on top of your original loan. These can be useful if you need extra funds for improvements or other investments after the initial loan.
When looking for additional funding, it is important to familiarize yourself with First Lien, Second Lien etc.
Prepayment Terms
If you want to pay off your loan early, there are fees to consider:
- Fixed-Rate Loans: Require “yield maintenance,” which compensates the lender for the interest they’ll miss out on.
- Variable-Rate Loans: Use a declining prepayment premium, meaning the fee decreases as the loan gets closer to maturity.
Rate Lock
A rate lock lets you secure your interest rate for 30 to 180 days. This protects you from market fluctuations while finalizing your loan. The Streamlined Rate Lock option simplifies the process for eligible borrowers.
The rate lock usually happens when the HUD lender sees that the loan will actually close. Once they are highly confident the HUD application will be approved, they will go to the market and lock the rate. When interest rates are rising, there can be a substantional savings be locking in the rate 0.25% or 0.5% lower than the market rate at closing.
Interest Accrual Options
Accrual determines how interest is calculated:
- 30/360: Assumes 30 days in every month, simplifying calculations.
- Actual/360: Uses the actual number of days in each month, leading to slightly different interest amounts each month. This make a difference in the month of February for example, which only has 28 days.
Escrows
Borrowers typically need to set aside funds for:
- Replacement reserves: To cover major repairs and replacements.
- Taxes and insurance: To ensure these are paid on time.
The replacement reserve is a monthly expense which is important to familiarize yourself with. In plain terms, it is a savings account for major repairs to the property. When it can be used, and for what type of work, is detailed in the loan servicing documents.
Appraisal and Third-Party Reports
Independent reports are required to assess the property’s value and condition, such as:
- Appraisal: Confirms the property’s market value.
- Phase I Environmental Site Assessment: Identifies potential environmental risks (e.g., contamination).
- Property Condition Assessment: Reviews the property’s physical state.
These reports are ordered by the lender, and the borrower has to pay for these reports.
Recourse or Non Recourse
Most loans over $750,000 are non-recourse, meaning the lender can only seize the property (not your personal assets) if you default. However, exceptions (“carve-outs”) apply for fraudulent acts or bankruptcy.
Non-recourse loans are not made so that you don’t have to repay them. A non-recourse loan is made for you to have the ability to leverage your current wealth to grow your portfolio.
If your personal net worth for example is: $2,000,000. And you have a business / property loans of $10,000,000. It will be hard to find a loan to buy another property, if you are personally securing the current loans.
Investors with stable commercial real estate properties that they plan on holding for many years, will convert to non-recourse financing to grow their portfolio.
Loan Assumption
Fannie Mae loans are usually assumable, meaning if you sell the property, the buyer can take over the loan. However, the buyer must meet Fannie Mae’s financial and experience standards.
Final Thoughts
Understanding these terms can help you navigate the complexities of commercial real estate investment. Fannie Mae’s multifamily loans are designed to provide flexible, competitive financing for stabilized properties. For personalized guidance, reach out to a Fannie Mae representative or a trusted financial advisor.
