Small Apartment Loans: The Best Options for Borrowers

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 to be ‘small’ loans. 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 ‘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 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 review Fannie and Freddie’s small apartment loan options, while also taking a 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 $1-3 million, that doesn’t mean they’re ideal for loans of that size. In fact, even if a lender states that a loan product or program begins at $1-3 million (or a similar 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. In addition, application fees for many standard multifamily loans can 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. SBL program rates are slightly lower for borrowers in “Top Markets,” such as 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 divided by region (Freddie Mac has divided the U.S. into five regions for the purpose of the SBL program), with slightly different interest rates for each region. 

Typical terms include:

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 45-60 days post-application

Fannie Mae Small Loans: A Great Choice for Borrowers in Smaller Markets

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 terms include:

Size: $750,000 minimum, $6 million maximum 

Terms: 5-30 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 45-60 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 is 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 set-up and other expenses. 

Typical CMBS terms include: 

Size: $2 million+

Term: 5, 7, and 10-year fixed-rate loans (adjustable-rate loans are available but rarely used)

Amortization: 25- 30 years

Maximum LTV: 75%-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. HUD generally prefers borrowers with a lot of multifamily experience, extremely strong financials-- and, for borrowers who do qualify, loans can often take between 6 and 10 months to close. While they 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 generally aren’t a good fit for borrowers looking for less than $4-5 million in financing.