Comparing Fannie Mae Small Mortgage Loans and Freddie Mac Small Balance Loans
While most investors will think a $5 million dollar commercial real estate purchase is a big deal, lenders consider it to be a small deal. Hence the names of these programs are Small Mortgage Loans and Small Balance Loans.
Investing in multifamily properties can be a lucrative venture, however finding the right loan product can be a major headache. Don’t even waste your time trying to find out what the actual interest rate is for the loan, because all the lender will tell you, is that it depends on the closing date.
When comparing HUD loans to traditional lenders like banks here are a few things to remember. The interest rate is not the main issue, there are many other details that can make one loan more suitable to you than another.
- What are the loan fees?
- Replacement Reserve / Sinking Fund
- Occupancy Rate Requirement
- Quarterly / Yearly Reporting
- Annual Property Inspections
- Mortgage Insurance Premium
- Prepayment Penalty
- Fixed Rate / Adjustable Rate
Fannie Mae and Freddie Mac, two giants in the multifamily financing space, both offer tailored loan programs for small multifamily properties. Here, we provide an overview of each program followed by a side-by-side comparison to help you determine which option best suits your needs.
Fannie Mae Small Mortgage Loan Program
Fannie Mae’s Small Mortgage Loan Program is designed to cater to the unique needs of small multifamily property owners. This program features streamlined processes, competitive rates, and flexible loan terms to provide a straightforward solution for financing multifamily properties.
Key Features:
- Loan amounts up to $9 million.
- Terms range from 5 to 30 years.
- Fixed and variable interest rate options.
- Maximum Loan-to-Value (LTV) ratio of 80%.
- Minimum Debt Service Coverage Ratio (DSCR) of 1.25x.
- Non-recourse execution with carve-outs for bad acts.
- Prepayment flexibility with options like yield maintenance.
This program targets stabilized properties with five or more units, including conventional, affordable, cooperative, and manufactured housing communities.
Freddie Mac Small Balance Loan Program
Freddie Mac’s Small Balance Loan Program is known for its fast, flexible, and cost-effective solutions. The program leverages its Optigo® lender network to offer creative solutions and ensure efficient loan processing.
Key Features:
- Loan amounts ranging from $1 million to $7.5 million.
- Fixed-rate and hybrid ARM options (with initial fixed periods of 5, 7, or 10 years).
- Amortization periods up to 30 years.
- LTV ratios up to 80% in certain markets.
- DSCRs starting at 1.20x for top-tier markets.
- Non-recourse execution with standard carve-outs.
- Streamlined loan documents and third-party reports.
Eligible properties include stabilized multifamily housing with five or more units, including properties with tax abatements, housing vouchers, or local rent subsidies.
Side-by-Side Comparison Table
| Feature | Fannie Mae Small Mortgage Loan | Freddie Mac Small Balance Loan |
|---|---|---|
| Loan Amount | Up to $9 million | $1 million to $7.5 million |
| Loan Terms | 5 to 30 years | 5-, 7-, or 10-year terms |
| Interest Rates | Fixed and variable options | Fixed and hybrid ARM options |
| Amortization | Up to 30 years | Up to 30 years |
| LTV Ratio | Up to 80% | Up to 80% (market dependent) |
| DSCR | Minimum 1.25x | 1.20x to 1.40x (market tier) |
| Recourse | Non-recourse | Non-recourse |
| Prepayment Options | Yield maintenance and others | Declining schedules, yield maintenance |
| Third-Party Reports | Streamlined (ASTM E-1528-14) | Streamlined |
| Special Features | Delegated model, flexible execution | Optigo lender network, hybrid ARM flexibility |
Choosing the Right Loan Program
Both Fannie Mae and Freddie Mac offer robust options tailored to the small multifamily market. The choice between them depends on your property’s characteristics, market location, and financing preferences.
Fannie Mae may be ideal for borrowers seeking higher loan amounts ($7.5 million – $9 million) and longer loan terms, while Freddie Mac stands out for its hybrid ARM offerings and localized lender network.
For personalized advice, you should consult with your HUD lender or commercial real estate mortgage consultant to ensure you find the best fit for your investment strategy.
Sources: Freddie Mac Small Balance Loan [1], Fannie Mae Small Loan Program [2]
