Everything You Need to Know About Multifamily Agency Lending

While real estate is historically known as a reliable and attractive investment, the multifamily market specifically is currently experiencing enticing growth. In October last year, the Federal Housing Finance Agency (FHFA) announced that the multifamily loan purchase caps for its lending agencies - Freddie Mac and Fannie Mae - would be increasing by 11.4% to $78 billion each in 2022. 

Before applying for a loan, it’s a good idea to understand how multifamily agency lending works and what mortgage products are available to prospective borrowers. 

How Agency Lending Works

Freddie Mac® and Fannie Mae® are more formally known as the Federal Home Loan Mortgage Association and the Federal National Mortgage Association. They are government-sponsored enterprises (GSEs), designed to expand the secondary mortgage market in the US. Simply put, this means the loans they issue are later bundled and sold to third-party investors. 

Technically, Freddie Mac® and Fannie Mae® don’t issue the loans directly. They work with licensed lenders that underwrite the loans in accordance with agency requirements. The agencies then purchase the loans, package them together as a security, and sell them to investors such as banks, mutual funds, money managers, and insurance companies.

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Agencies vs Other Lenders

GSE agencies typically offer more favorable terms to multifamily investors than banks and other lending agencies. Firstly, they primarily offer non-recourse loans. This means that if you happen to default on your loan, the underlying asset is the only asset that can be seized and sold by the agency. By comparison, banks and other agencies tend to sell recourse loans, which allow them to seize and sell your personal assets if the value of the property does not cover the loan amount.

Secondly, agencies are more likely to offer higher leverage loans, with loan-to-values (LTVs) up to 80% and a long amortization. It would be unusual to secure such terms through a community or commercial bank without a significant increase in the interest rate. Agencies on the other hand are more willing to offer a lower rate on higher leverage loans.

Granted, agency loans are not appropriate for all investors. The minimum loan amount for most products is $1 million, and the agencies are unlikely to underwrite a property that requires significant repairs or renovation. 

What You Need to Qualify

As to be expected, borrowers must meet certain requirements to qualify for an agency loan. You should have a credit score of at least 680, a personal net worth equal to the loan amount, and available liquidity equal to at least nine months of debt service. 

Additionally, agencies prefer borrowers with multifamily ownership or management experience. You should also live within 100 miles of the underlying property, or have a third-party property manager in your employ. It is worth noting though that the agencies are sometimes flexible with these requirements, especially for lower leverage loans.

Loan approval is also contingent on the quality of the underlying property.  The property should be in good condition, and have at least 90% occupancy for the past 90 days.

Agency Loan Products

You can read a brief description of the most popular agency loan products below. Login to LoanCenter to see the loans and terms available for a specific property. 

Fannie Mae Delegated Underwriting and Servicing (DUS)

Fannie Mae® DUS loans start at $3 million for multifamily properties with a minimum of five units. The loans are typically non-recourse, with fixed and variable interest rate options available. DUS loans are mostly used to acquire or refinance large multifamily properties. 

Freddie Mac® Optigo Small Balance Loan (SBL)

Freddie Mac® SBL loans range from $1 million to $7.5 million for multifamily properties with 5+ units.  Fixed rate terms of 5, 7, and 10 years are available, as well as 20-year hybrid adjustable-rate mortgage (ARM) terms. The interest rates vary, but are generally lower for properties in high growth markets. Like DUS, SBL loans are one of the most versatile mortgage products available to multifamily investors. 

Freddie Mac® Optigo Conventional

Freddie Mac’s standard multifamily loan product is available in multiple varieties, offering fixed and variable interest rate loans between $5 million and $100 million. 

Fannie Mae® Small Loans

Fannie Mae’s Small Loans product offers a more flexible loan amount ranging from $750K to $6 million. With terms from 5 to 30 years and maximum LTVs of 80%, these 30-year amortizing non-recourse loans are ideal for investors interested in smaller multifamily properties. 

While there are additional loan products available through agency-approved lenders, the four products above represent a considerable share of all agency loans. 

A more thorough understanding of how multifamily agency lending works, and what mortgage products are available can help you ensure your investment is financed with the best possible terms.

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