Fannie Mae ARM 7-4 Loans

If you're a multifamily investor looking for a shorter-term loan solution before converting to longer-term financing, the Fannie Mae ARM 7-4 could be the perfect option.

With a seven-year loan term and a 4% interest rate cap (plus guarantee and service rate fees), the ARM 7-4 can be a flexible and affordable way to finance a multifamily property. The ARM 7-4 has a minimum loan amount of $1 million and a maximum LTV allowance of 80% (75% for cash-out refinances.) Plus, ARM 7-4 loans can be converted to fixed-rate financing anytime between the first day of the second year and the first day of the sixth year of the loan. Just like most other Fannie Mae multifamily loans, Fannie Mae 7-4 ARM loans are mostly non-recourse, and non-recourse 7-4 ARM loans are fully assumable (with lender approval and a 1% fee.) 

Sample Fannie Mae Terms for ARM 7-4 Loans in 2024

Size:  $1 million minimum loan amount 

Term:  7 years 

Use:  Acquisition or refinance of stabilized multifamily properties 

Amortization:  Up to 30 years

Interest Rate: Based on the 30-day average SOFR

Interest Rate Cap: 4.00% + guarantee fee rate and servicing fee rate, interest rates cannot increase or decrease more than 1.00% per month 

Maximum LTV:  80%, 75% for cash-out refinancing 

Minimum DSCR:  1.00 (at max. lifetime interest rate) 

Recourse:  Most loans are non-recourse with standard “bad boy” carve-outs for fraud and other bad acts, loans less than $3 million may be recourse in some areas  

Prepayment Options:  Yield maintenance or declining prepayment premiums

Occupancy Requirements: 85% physical occupancy, 70% economic occupancy, 90% physical occupancy for loans under $3 million 

Fixed-Rate Conversion: The ARM 7-4 can be converted to a fixed-rate loan on any rate-change date between the first day of the second year of the loan and the first day of the sixth year of the loan. No pre-payment penalty is due upon conversion to fixed-rate financing. 

Timing:  Loans typically take between 45 and 60 days from application to closing

Eligible Borrowers

Most lenders and Fannie Mae prefer borrowers to be a single asset Single Purpose Entity (SPE), though a waiver may be available in certain situations. 

Eligible Properties

• Stabilized properties with 5-50 units

• Multifamily affordable properties (no size limitations)

• Manufactured housing communities

Advantages

• Competitive interest rates

• Most loans are non-recourse

• 30- 180 day rate locks available after commitment (with an additional fee)

• Loans are fully assumable with lender approval and a 1% fee

Disadvantages

• Requires third-party reports including a property appraisal, property condition assessment, and a Phase I Environmental Assessment

• Requires replacement reserves (minimum of $250/unit per year)

• $12,500 application deposit and $3,000 processing fee required

• 1% origination fee also required

• Does not allow for supplemental financing before conversion to a fixed-rate loan

• 2% deposit due at rate lock (refunded after Fannie Mae purchases loan, usually around 30 days post-closing)

Case Study: Buying in Albuquerque

Meet Soledad, a seasoned multifamily property investor based in Albuquerque, New Mexico. She discovered a promising opportunity to acquire a stabilized multifamily property in a rapidly growing neighborhood in Albuquerque. The property had 40 units and was listed at $12 million.

Seeking flexible and affordable financing, Soledad turned to the Fannie Mae ARM 7-4 loan program. After careful consideration and positive financial analysis, she decided to apply for a $9.6 million ARM 7-4 loan, corresponding to an 80% loan-to-value (LTV) ratio.

The loan featured a 30-year amortization period. With the current 30-day average SOFR at 0.05%, plus a guarantee fee rate of 0.50% and servicing fee rate of 0.25%, the loan's starting interest rate was approximately 0.80%. Moreover, the loan offered a cap of 4.00% plus the guarantee and servicing fees, ensuring that Soledad's interest rate would never exceed 4.75% during the seven-year loan term.

One of the reasons Soledad opted for the ARM 7-4 was the opportunity to convert to a fixed-rate loan anytime between the second and sixth year of the loan term, without any prepayment penalty. This feature offered her the flexibility to adjust her financing strategy as market conditions evolve.

After 45 days of processing, the loan was approved and Soledad was able to acquire the multifamily property. The ARM 7-4 loan gave Soledad the flexibility and affordability she sought, contributing to her ongoing success as a multifamily property investor.

This is a fictional case study provided for illustrative purposes.