The Benefits of Agency Loans for Apartment Investors

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If you’re interested in purchasing or refinancing a multifamily property, getting the right type of financing is key. Fortunately, the government-sponsored enterprises (GSEs) Fannie Mae® and Freddie Mac®, also known as the ‘agencies’ provide some of the best loan terms on the market. In fact, in 2018, the agencies issued more than $143 billion in multifamily loans, with Fannie Mae issuing more than $65 billion of loans and Freddie Mac issuing around $78 billion in multifamily financing. 

However, it’s important to realize that Fannie® and Freddie® don’t actually provide these loans themselves. Instead, they work in concert with approved private lenders. Once an approved lender makes a loan to a borrower, Fannie® or Freddie® will purchase it. At that point, they will generally pool it with a variety of other loans in a process known as securitization, and will then sell the resulting bonds to investors on the secondary market. 

What Makes Agency Loans So Great? 

That’s a good question — and we’ll try our best to answer it. First, agency financing is (with few exceptions) non-recourse, which is a huge benefit for borrowers. Second, leverage for most agency loans goes to 80%, with up to 75% for cash-out refinances, which is slightly more generous than most banks or CMBS lenders.

Third, agencies generally offer long amortizations (with lots of flexibility), and some loans even offer fully-amortizing options. Finally, rates are typically quite low with this type of financing, as the risk for lenders is somewhat limited. Of course, this really just scratches the surface of why these loans are such a great option; other benefits include the plethora of loan types offered, with specialized loans for affordable/LIHTC properties, senior living facilities, cooperative apartments, student housing, and much, much more. 

Qualifying for Agency Loans 

Qualifying for an agency loan isn’t necessarily a walk in the park, but it’s not nearly as difficult as getting approved for some kinds of financing, such as HUD/FHA multifamily loans. In most cases, borrowers need to have good credit (typically a 660-680 minimum FICO score), and a net worth of at least 100% of the loan amount, not including retirement accounts. They should also have liquidity of at least 10% of the total loan amount.

However, these are not hard and fast rules, and exceptions can be made, particularly if there is a compensating factor, such as lower leverage. Lenders and agencies also like to see borrowers with some type of multifamily ownership or management experience, though this is also sometimes negotiable, depending on the individual deal. 

When it comes to the property itself, most agency loan products permit up to 80% LTV, with DSCRs as low as 1.25x. Some loans, like the Freddie Mac Small Balance Loan (SBL) provide substantially better terms to properties in larger MSAs, while for other loan products, this isn’t as much of a factor.

Comparing Agency Loans to Banks, CMBS, and HUD/FHA Apartment Loans

When stacked up against bank financing and CMBS, agency loans can generally hold their own. And, while HUD/FHA multifamily financing may be superior in certain respects, long wait times and somewhat strict qualification requirements often leave it out of reach for many multifamily borrowers. This is especially the case for those attempting to borrow amounts between $1 million and $7 million.

When compared to banks, agency loans are better in a few ways: Nearly all bank loans are full-recourse, while nearly all Fannie or Freddie multifamily loans are non-recourse, not to mention the fact that they offer higher leverage and (often) longer terms. When compared to CMBS, agency loans also often offer longer and more flexible term options, slightly higher leverage, and, in general, a superior loan servicing experience. 

The Most Popular Types of Agency Multifamily Loans

Combined, Fannie Mae and Freddie Mac have more than 50 distinct multifamily financing products, but only a few are suitable for the average multifamily borrower. Some of the most utilized loan products include: 

• Fannie Mae DUS: The most popular type of Fannie Mae multifamily loan, DUS loans start at $3 million with no set upper limit. Both fixed and floating rate financing options are available. 

• Freddie Mac SBL: Designed for loans between $1 million and $7.5 million, the SBL program is growing in popularity. With fixed-rate terms up to 10 years, and hybrid ARMs up to 20 years, Small Balance Loans are an ideal choice for many multifamily investors. 

• Freddie Mac Conventional: Freddie Mac’s conventional loan programs come in several varieties, with fixed-rate and floating-rate programs offering loans between $5 million and $100 million. 

• Fannie Mae Small Loans: Similar to Freddie®’s SBL program, Fannie Mae Small Loans offers financing in amounts between $750k and $6 million. Fully amortizing 30-year terms are available for qualified borrowers, while rates are lower in smaller markets when compared to Freddie Mac Small Balance Loans. 

• Supplemental Loans: Both Fannie Mae and Freddie Mac offer supplemental loan programs for current borrowers, which can help provide them with additional funding when they need it. 

Other products include loans specifically intended for affordable housing/Section 8 properties, manufactured housing communities, senior/assisted living centers, student housing, military housing, moderate rehabilitation of conventional apartment properties, as well as various forms of tax-exempt bond financing. 

Sample Agency Loan Terms 

To give you a fuller picture of agency loan terms, we’ve included sample terms below. Keep in mind that terms vary significantly between loan products and that the terms below are somewhat general. 

Size: $1 million+ ($750k+ for Fannie Mae Small Loans) 

Terms: Floating and fixed-rate options with 3, 5, 7, 10 + year terms 

Amortization: Up to 30 years

Maximum LTV: 80% 

Minimum DSCR:  From 1.25x

Recourse: Non-recourse with standard “bad boy” carve-outs

Rate Locks: Early rate-lock option available for varying durations

Prepayment: Yield maintenance, defeasance, and step-downs available. Varies by loan type.