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What Is the Difference Between the Freddie Mac Small Balance Loan and the Fannie Mae Small Loan?
Compare the country’s leading popular multifamily financing options under $8 million with our handy guide. While they share much in common, some key differences could make one more attractive to certain investors.
When it comes to small balance agency loans, multifamily investors may find themselves caught between choosing either the Freddie Mac SBL program or the Fannie Mae® Multifamily Small Loan program. Of course, there was a time when Freddie®’s SBL program was the only one in town for loans under $8 million. Fannie Mae® released its Small Loan program in 2009, though, becoming the industry’s only major competitor.
So, when looking for multifamily financing for amounts under $8 million, which one should an investor choose? The table below breaks down each loan’s key elements. This article below examines the key characteristics of each program to inform your decision.
Key Differences: Freddie Mac SBL vs. Fannie Mae Small Loans
See the table below to understand the key differences between these two financing options.
Freddie Mac SBL
Fannie Mae Small
Maximum Loan Amount
Minimum Credit Score (FICO)
Maximum Student/Military Tenancy
Comparing Freddie Mac Small Balance Loans and Fannie Mae Multifamily Small Loans
It is commonly believed that Freddie Mac Small Balance Loans are often a better choice for properties in larger markets, while Fannie Mae Small Loans are better suited for properties in smaller markets. The reasoning behind this varies, mostly based on the structure and requirements of each program. For instance, the minimum DSCR for Fannie Mae Small Loans is set at 1.25x for all markets. The SBL program, on the other hand, sets minimums based on market tier. Fannie®’s static requirement is one of the main reasons why its product is sought after outside major metropolitan areas.
That said, even though many borrowers find Fannie Mae’s DSCR requirements to be more desirable, Fannie Mae Small Loans have substantially stricter credit requirements. Take the credit score requirements for each program, for example. Borrowers need a minimum FICO credit score of 650 to be eligible for a Freddie SBL, while Fannie Small borrowers need a score of 680.
Further restrictions are placed on tenant concentrations in the Fannie Mae Multifamily Small Loan program, as well. While student and military tenant concentrations of 50% or less are allowed in the SBL program, Fannie Mae limits this at 20%. Additionally, Freddie Mac is slightly more lenient when it comes to commercial space. Properties financed by small balance loans are restricted to deriving a maximum of 25% of effective gross income from commercial tenants, while Fannie Mae caps this limit at 20%.
Beyond those considerations, the programs have a few other key differences that investors should be aware of. Fannie’s program, for example, offers 30-year terms while Freddie’s SBL program limits the term to 20 years. Fannie Mae’s maximum loan size for multifamily small loans is $6 million, while Freddie has a $7.5 million maximum per loan. Finally, Fannie borrowers may find that supplemental financing is a little easier to obtain, since they are eligible for Fannie Mae Supplemental Financing only 12 months after origination — an opportunity not mirrored by Freddie’s SBL program.
Similarities Between Fannie Small and Freddie SBL at a Glance
Maximum LTVs of 80%.
Amortization periods of up to 30 years.
Streamlined agency application and closing processes.
Fixed and variable interest rate options available.
Non-recourse structure (with standard “bad-boy” carve-outs).
Allowances for affordability components.
Limitations on income gained from commercial space.
Closing costs of up to 3% of the loan amount can be included in the loan.
Differences Between Fannie Small and Freddie SBL at a Glance
Freddie’s SBLs are often more expensive in smaller markets.
Fannie Mae offers loan terms of up to 30 years, compared to SBL’s 20-year maximum.
Small Balance Loans have a lower credit score requirement (650+) than Fannie Small Loans (680+).
Freddie Mac’s SBL program has stricter background check requirements.
The Freddie Mac SBL program allows up to 50% of the tenant concentration to be student or military tenants while Fannie Mae Small Loans limit this to 20%.
Unlike Fannie Mae, Freddie Mac allows for carve-out waivers for properties that have a 65% or lower LTV and a 1.40x or higher DSCR.
Fewer lenders issue Freddie Mac Small Balance Loans.
Section 8 properties are not eligible for the Freddie Mac SBL program.
What are the key differences between the Freddie Mac Small Balance Loan and the Fannie Mae Small Loan?
The key differences between the Freddie Mac Small Balance Loan and the Fannie Mae Small Loan are:
- The maximum loan amount for Freddie Mac SBL is $7.5 million, while the maximum loan amount for Fannie Mae Small Loans is $6 million.
- The maximum LTV for both is 80%.
- The maximum term for Freddie Mac SBL is 20 years, while the maximum term for Fannie Mae Small Loans is 30 years.
- Both are non-recourse.
- The DSCR requirement for Freddie Mac SBL is market dependent, while the DSCR requirement for Fannie Mae Small Loans is a minimum of 1.25x.
- The minimum credit score (FICO) for Freddie Mac SBL is 650, while the minimum credit score (FICO) for Fannie Mae Small Loans is 680.
- The maximum student/military tenancy for Freddie Mac SBL is 50%, while the maximum student/military tenancy for Fannie Mae Small Loans is 20%.
For more information, please see this article.
What are the advantages of the Freddie Mac Small Balance Loan compared to the Fannie Mae Small Loan?
The Freddie Mac Small Balance Loan (SBL) offers several advantages compared to the Fannie Mae Small Loan. The SBL program has a lower credit score requirement (650+) than Fannie Small Loans (680+). Additionally, Freddie Mac’s SBL program allows up to 50% of the tenant concentration to be student or military tenants while Fannie Mae Small Loans limit this to 20%. The SBL program also allows for carve-out waivers for properties that have a 65% or lower LTV and a 1.40x or higher DSCR, which is not available in the Fannie Mae Small Loan program. Finally, the SBL program has a maximum loan size of $7.5 million per loan, compared to Fannie Mae’s maximum loan size of $6 million.
What are the eligibility requirements for the Freddie Mac Small Balance Loan?
The eligibility requirements for the Freddie Mac Small Balance Loan depend on the loan size. For loans under $1 million, eligible borrowers include previous Freddie Mac Multifamily borrowers, borrowers taking out multiple loans simultaneously, borrowers who are likely to engage Freddie Mac for 2+ additional loans within the next 12 months, borrowers with significant multifamily experience in the area (2+ years local multifamily experience and 2+ multifamily properties owned), and loans that were initially approved for $1 million+ but were later constrained by property NOI or other factors. Additionally, properties must underwrite a vacancy of at least 5% and an expense ratio of at least 30%.
For loans between $6 million and $7.5 million, they are generally only permitted in Top & Standard Markets, can have no more than 100 units, and will require a borrower to order additional third-party reports, including a survey report and a zoning report. Additionally, loans of more than $6 million require a minimum DSCR of 1.25x, and require that borrowers form a Single Asset Entity (SAE).
For more information, please visit https://apartment.loans/freddie-mac-apartment-loans/ and https://apartment.loans/freddie-mac-small-balance-loans/.
What are the eligibility requirements for the Fannie Mae Small Loan?
The Fannie Mae Multifamily Small Loan Program has a few eligibility requirements that borrowers should consider. Most importantly, there is zero-tolerance when it comes to borrowers being able to meet the minimum requirements for net worth and liquidity. Being able to meet those stated minimums can make or break the entire deal.
The program has a minimum expenditure requirement for specific expense line items like maintenance, payroll, management, and replacement reserves. Another detail worth noting is that the quality and condition of the subject property are of high importance. A property condition inspection is required for the deal, and any discovered deficiencies must be addressed and fixed before the transaction can close.
There are some lesser-known criteria for subject properties under the small loan program as well. Properties located in seismic zones 3 & 4 with subterranean or “tuck away” parking structures require a PML report. Properties with unreinforced masonry construction, as well as properties built before 1980 that have not had seismic reinforcements or retrofits completed are generally ineligible for financing. Non-Contiguous properties are eligible with a Fannie Mae waiver.
A Fannie Mae waiver is also required for phased properties as well. Properties that belong to an HOA or are a part of a PUD are typically ineligible. Borrowers should be aware that absentee ownership of any property financed through the program requires professional management.
In addition to the facts above, here are a few more things to take into consideration when shopping for a Fannie Mae Multifamily Small Loan:
- Even though the loans are non-recourse, key principals must sign an “exceptions to non-recourse” document, and face some liability
- Borrowing entities and key principals must undergo rigorous lien, litigation, and bankruptcy searches.
- There is a higher insurance expense in this type of transaction due to the higher coverage requirements in the secondary market.
- The Fannie Mae waiver that is required for non-contiguous and phased properties is difficult to obtain.
For more information on the Fannie Mae Multifamily Small Loan Program, please visit apartment.loans/fannie-mae-multifamily-small-loan-program.
What are the maximum loan amounts for the Freddie Mac Small Balance Loan?
The Freddie Mac Small Balance Loan program has a minimum loan amount of $750,000 and a maximum amount of $7.5 million. Additional Requirements for Small Balance Loans Over $6 Million and Multifamily Freddie Mac Loans.
What are the maximum loan amounts for the Fannie Mae Small Loan?
The maximum loan amount for the Fannie Mae Small Loan is $6 million. This is according to this source, which states that the maximum loan amount for the Fannie Mae Small Loan is $6 million, compared to the $7.5 million maximum loan amount for the Freddie Mac Small Balance Loan.