For investors with smaller multifamily properties, loan options may seem a bit limiting. However, there are plenty of strong financing choices out there.
What Investors Should Know About Small Apartment Loans
While there’s nothing small about millions of dollars, in the multifamily finance industry, apartment loans ranging from $1 million to $7 million are generally considered small.
This isn’t to minimize the importance of these loans to the investment market, simply to differentiate them from the $10, $20, and $30+ million loans that are often offered to larger institutional investors. In fact, in terms of loan origination, these so-called small loans are perhaps the fastest-growing segment of the multifamily financing market. For instance, in 2018, Freddie Mac originated $8.3 billion in loans through its Small Balance Loan program, one of the most popular small apartment loan products on the market. That’s up from $7.8 billion in 2017, a 6% year-over-year increase. Fannie Mae also originates billions of dollars of loans each year with its SBL alternative, the Fannie Mae Multifamily Small Loan. While Fannie and Freddie aren’t the only options in town for small-balance investors, they’re often the best choice. In this article, we’ll compare Fannie and Freddie's small apartment loan options, while also taking a quick look at CMBS loans and other relevant financing options. Why Small Apartment Loans Are Important for Investors
While it’s true that a lot of loan programs start at $2 or $3 million, that doesn’t mean they’re ideal for loans of that size.
Even if a lender states that a loan product or program begins around this amount, they may be less likely to agree to finance these smaller loans. This is due to the fact that they’ll generally be putting the same amount of effort to underwrite and originate these loans while receiving a smaller payout, as most lenders are compensated based on a percentage of the total loan amount.
Key takeaways
For small apartment building investors, Freddie Mac's SBL program and Fannie Mae's Multifamily Small Loan program offer very attractive financing.
Both small loan programs typically begin at $1 million and have lower fees than many other types of financing.
If these agency loans are not a good fit for your investment, there are many other viable financing instruments, including HUD loans.
In addition, application fees for many standard multifamily loans can be very steep. For example, Freddie Mac Conventional Loans generally have application fees of between $12,000 and $15,000, while Fannie Mae DUS Loans typically require a $20,500 application deposit and an additional $3,000 in processing fees. Both Fannie and Freddie’s Small Loan programs have fees that are approximately half that amount, leading to significant savings for borrowers.
Freddie Mac Small Balance Loans: An Excellent Option for Borrowers in Larger Markets
As we just mentioned, the Freddie Mac Small Balance Loan program, also known as the SBL program, is an increasingly popular choice for small multifamily borrowers. These loans range in size from $1 million to $7.5 million, meaning that they fit perfectly into the small balance niche. They also offer a great degree of flexibility for borrowers, as they offer fixed-rate, floating-rate, and interest-only loan options with a variety of term lengths and amortization periods.
SBL program rates are slightly lower for borrowers in the program's top markets, like New York City or Los Angeles, while being higher for borrowers in so-called Standard, Small, and Very Small markets. Therefore, Small Balance Loans are generally a better deal for borrowers looking to finance properties in major MSAs. In addition, it should be noted that SBL pricing is further differentiated by region (Freddie has divided the U.S. into five regions for the purpose of the SBL program), with slightly different interest rates for each region. Typical Freddie Mac SBL Terms
Loan Sizing: $1 million minimum, $7.5 million maximum
Uses: Purchases or refinances of stabilized multifamily properties
Amortization: Up to 30 years
Maximum LTV: 80% for Top and Standard Markets, 75% LTV for purchases and up to 70% for refinances in Small/Very Small Markets
Minimum DSCR: 1.20x for Top Markets, 1.25x for Standard Markets, 1.30x for Small Markets, 1.40x for Very Small Markets
Recourse: Loans are typically non-recourse with standard carve-outs
Terms: 20-year hybrid adjustable-rate loan with a 5, 7, or 10-year initial fixed-rate period, or a 5-, 7-, or 10-year fixed-rate loan (partial and full-term interest-only loan options are also available)
Borrower Requirements: Borrowers usually need a net worth of at least 100% of the loan amount and liquidity equal to 10% of the loan amount (adjustable based on various factors)
Timing: Closing generally occurs 45 to 60 days after application
Fannie Mae Small Loans: A Great Choice for Borrowers in Smaller Markets
Fannie Mae Small
Terms last updated
Interest Rates
6.07% to 8.17%
Loan Amount
From $1M to $9M
Loan Term
From 5 to 30 years
Max LTV
up to 80%
Min DSCR
1.2x
Recourse
Non-recourse
Amortization
up to 30 years
Great for smaller multifamily properties, especially those in secondary or tertiary markets or with affordable components.
The Fannie Mae Small Loan is Fannie Mae’s most popular option for small apartment financing. It shares a lot in common with the Freddie Mac SBL program but offers a few features that Small Balance Loans do not. For instance, Fannie Mae Small Loans permit borrowers to utilize 30-year fully-amortizing loan terms, meaning that they may not need to refinance their loan before the property is fully paid off. In addition, these loans can be used for manufactured housing communities and housing cooperatives, while SBL loans typically cannot. Perhaps most importantly, rates are generally lower in smaller markets when compared to the SBL program, which can be extremely beneficial for those looking to finance properties outside major MSAs.
Typical Fannie Mae Multifamily Small Loan Terms
Size: $750,000 minimum, $6 million maximum
Terms: 5- to 30-year fixed-rate terms, with floating-rate, partial and full-term interest-only and hybrid ARM options available
Amortization: Up to 30 years
Maximum LTV: 80%, 75% for refinances
Minimum DSCR: 1.25x
Recourse: Loans are generally non-recourse with standard carve-outs
Prepayment Options: Graduated step-downs or yield maintenance
Eligible Properties: Conventional apartment properties, affordable properties and manufactured housing communities (MHCs) with 50+ pad sites
Borrower Requirements: Borrowers usually need a net worth of at least 100% of the loan amount and liquidity equal to 6 months of mortgage payments (principal and interest)
Commercial Limits: Commercial space is limited 35% of the project's rentable area and must not contribute more than 20% of the property’s effective gross income
Timing: Closing generally occurs 45 to 60 days post-application
CMBS Loans: Ideal for Lower Net Worth Borrowers
For those who don’t quite fit inside the agency box, CMBS financing (also known as conduit financing) remains a viable alternative for those seeking small apartment loans. CMBS loans generally start at $2 million, but in rare situations, certain lenders may be able to offer loans as low as $1 million. Conduit loans are generally ideal for situations in which a borrower doesn’t have a particularly high net worth (e.g. 50% of the total loan amount), or has a lower than ideal credit score). They can also be utilized for unconventional properties, such as a 50/50 mixed-used residential/commercial project (unlike Fannie and Freddie, CMBS can be used for all income-producing commercial property types).
In terms of application fees, smaller CMBS loans can often be more expensive than comparable agency financing. For instance, lender legal fees generally cost borrowers $15,000 for loans under $5 million, and can often go up to $30,000 for borrowers seeking more than $5 million. Origination fees can often range from $7,000 to $10,000, with additional costs for servicing setup and other expenses. Typical CMBS Loan Terms
Size: $2 million+
Term: 5-, 7-, and 10-year fixed-rate loans (adjustable-rate loans are available but rarely used)
Amortization: 25 to 30 years
Maximum LTV: 75% to 80%
Minimum DSCR: 1.25x
Recourse: Non-recourse with standard carve-outs
Prepayment: Yield maintenance or defeasance
Commercial Limits: Commercial space is limited to 25% of a project’s gross income (exceptions can be made on an individual basis)
Other Options: Banks and HUD/FHA Multifamily Loans
Of course, agency loans and CMBS aren’t the only loan options when it comes to acquiring or refinancing smaller apartment properties. Bank loans are another option, but they usually aren’t the best choice if a borrower can qualify for CMBS or agency debt, due to the fact that these loans are generally full-recourse financial instruments.
HUD multifamily financing is another great choice, but these loans can be difficult to get, especially for smaller borrowers. For borrowers who do qualify, loans can often take upwards of half a year to close, though HUD is improving its closing timelines.While HUD loans technically start at $2 million (with some exceptions) for HUD 221(d)(4) construction and substantial rehabilitation loans, and $1 million for HUD 223(f) purchase and refinance loans, in practice, they usually aren’t a good fit for borrowers looking for less than $4 to $5 million in financing.Multifamily Mortgage Calculator
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Frequently Asked Questions
What are small apartment loans?
Small apartment loans are commercial real estate loans that typically range from $1 million to $7 million. These loans are offered to investors involved in smaller apartment properties and are becoming increasingly popular.
What are the benefits of small apartment loans?
Small apartment loans offer a variety of benefits to investors, including lower application fees, increased flexibility, and lower interest rates in larger markets. They also provide the option of longer amortization periods.
What are the requirements for small apartment loans?
The requirements for small apartment loans vary depending on the lender and loan product. Generally, borrowers need a net worth of at least 100% of the loan amount and liquidity equal to six months of mortgage payments (counting both principal and interest). Additionally, there are usually restrictions on the amount of commercial space that may be in the building.
What are the different types of small apartment loans?
The two most popular types of small apartment loans are Freddie Mac's Small Balance Loan program and Fannie Mae's Multifamily Small Loan program. Both of these loan products offer competitive terms and are often the best choice for small-balance investors. Other financing options include CMBS loans.
Freddie Mac's Small Balance Loan program offers loan amounts ranging from $1 million to $7 million, with loan terms of up to 30 years. The program also offers competitive interest rates and flexible prepayment options. For more information, visit Freddie Mac's Small Balance Loan page.
Fannie Mae's Multifamily Small Loan program offers loan amounts ranging from $750,000 to $6 million, with loan terms of up to 30 years. The program also offers competitive interest rates and flexible prepayment options. For more information, visit Fannie Mae's Multifamily Small Loan page.
CMBS loans are also available for small apartment loans. These loans are typically used for larger loan amounts, but can be used for smaller loans as well. CMBS loans offer competitive interest rates and flexible prepayment options. For more information, visit our CMBS loan page.
What are the advantages and disadvantages of small apartment loans?
The advantages of small apartment loans include lower rates in smaller markets, 30-year fully-amortizing loan terms, and the ability to finance manufactured housing communities and housing cooperatives. The main disadvantage is that they cannot be used for Small Balance Loans.
What are the best lenders for small apartment loans?
The best lenders for small apartment loans are typically Fannie Mae and Freddie Mac. Fannie Mae offers the Fannie Mae Multifamily Small Loan program, while Freddie Mac offers the Small Balance Loan program. Both of these loan products offer competitive terms and rates for small apartment loans ranging from $1 million to $7 million.
In addition to Fannie Mae and Freddie Mac, CMBS loans are also an option for small apartment loans. CMBS loans are typically more expensive than Fannie Mae and Freddie Mac loans, but they can be a good option for borrowers who don't qualify for Fannie Mae or Freddie Mac loans.
What are the best loan terms for small apartment loans?
The best loan terms for small apartment loans are typically offered by Fannie Mae. These terms include:
Size: $750,000 minimum, $6 million maximum
Terms: 5- to 30-year fixed-rate terms, with floating-rate, partial and full-term interest-only and hybrid ARM options available
Amortization: Up to 30 years
Maximum LTV: 80%, 75% for refinances
Minimum DSCR: 1.25x
Recourse: Loans are generally non-recourse with standard carve-outs
Prepayment Options: Graduated step-downs or yield maintenance
Eligible Properties: Conventional apartment properties, affordable properties and manufactured housing communities (MHCs) with 50+ pad sites
Borrower Requirements: Borrowers usually need a net worth of at least 100% of the loan amount and liquidity equal to 6 months of mortgage payments (principal and interest)
Commercial Limits: Commercial space is limited 35% of the project's rentable area and must not contribute more than 20% of the property’s effective gross income
Timing: Closing generally occurs 45 to 60 days post-application
What are the best strategies for getting approved for small apartment loans?
The best strategies for getting approved for small apartment loans include having a good credit score, a solid business plan, and a good relationship with the lender. Additionally, it is important to have a clear understanding of the loan terms and conditions, and to be prepared to provide the necessary documentation.
At Apartment.Loans, we offer a range of loan options for small apartment loans under $1MM, including FHA, Fannie Mae, Freddie Mac, and bridge loans. We also provide certainty of execution, 30-45 day loan closing, aggressive terms, white-glove customer service, and multiple loan options.