Fannie Mae and Freddie Mac's small loan program requirements are built on the attributes of well-performing loans. While sometimes challenging to navigate, especially for newer investors, they can serve as important guidelines for your success. Let's dive in and explore takeaways from five such requirements.
Table of contents:
1. Net worth and liquidity
Requirement:
Borrowers are required to have a net worth equal to at least 1x the loan amount and liquidity equal to at least nine monthly payments of principal and interest, or generally ~5% of the desired loan amount.
net worth: total assets minus total liabilities
liquidity: available cash in your checking or savings accounts plus other assets that can be quickly converted to cash
Takeaway:
Net worth and liquidity are important to provide a backstop for debt repayment if the property cash flow becomes insufficient to cover payments or if there are any temporary dips in the property’s performance. This is especially key for small multifamily properties as cash flow can drop significantly with only a few vacant units.
2. FICO score
Requirement:
Borrowers are typically required to have a minimum FICO score of 680 or better [1].
"Much like a single-family loan, FICO scores can be a good indicator for debt repayment on small multifamily loans."
-Paul Gembara, Senior Director, Credit Underwriting for Multifamily at Fannie Mae.
Takeaway:
Before you take on additional debt, you should make sure you are able to meet your existing obligations. A good FICO score is also important if you are financing a rental property with 1-4 units. “Single-family” loan programs have their own minimum FICO score requirements and will factor your FICO score into the overall interest rate and fees.
3. Out-of-state rental properties
Requirement:
Generally, out-of-state rental properties won’t qualify for Fannie Mae and Freddie Mac’s small loan programs as both agencies typically require borrowers to be located within 100-miles of the property being financed.
Takeaway:
This requirement is in line with the investing adage popularized and often attributed to legendary investors, Peter Lynch and Warren Buffett: “Buy or invest in what you know.”
Investing locally or in areas that you have some familiarity with will ensure that you have a good understanding of the market dynamics and can quickly address any issues that may arise at the property.
10 reasons why you should consider avoiding out-of-state rental properties:
- Lack of control due to a reliance on others to appropriately address day-to-day issues and repairs
- Extra time and effort required to find quality real estate agents, inspectors, contractors, maintenance workers and property managers you can count on
- Challenges with collecting rent, in full and on time
- Additional cost for local property management (could be as high as 12% of your rental income depending on the size of your property)
- Travel expenses and the extra time it takes to visit the property – even with a trusted property management company, you'll want to make occasional visits to ensure you’re getting the full story from the manager and tenants
- When evaluating a new property to purchase, pictures and information found online can be dated or misleading. Real estate is a tangible asset, and you can’t get as good of a feel for a property and neighborhood without seeing it in person
- Additional research is generally required to gain a sufficient understanding of a non-local market which can be costly and time-consuming
- Extra time and effort to understand local laws, regulations, codes, and ordinances to ensure your property is in compliance and assess any other impacts such as: your ability to increase rents, recover unpaid rent, evict tenants in violation of their lease, or make certain capital or cosmetic improvements
- Additional time and fees that may be necessary to file additional state tax returns
- Limited opportunities for off-market deals and a lower probability of being awarded deals without having local relationships with other owners and brokers, respectively
4. Rental property accounting
Requirement:
Per Fannie Mae and Freddie Mac loan documents, borrowers are required to provide a statement of income and expenses (commonly referred to as “operating statements”) and rent schedules (commonly referred to as “rent rolls”) to their lender at least once per year.
Takeaway:
While this may require some additional time and effort, there are a number of helpful and free or low-cost solutions such as as Stessa, Apartments.com, or QuickBooks, to name a few.
Utilizing these types of property management and accounting tools will help you manage your property more efficiently and be prepared for tax season. If you’re looking to continue to grow your portfolio and eventually bring in additional investors, they’ll also want to see this information for evaluating your performance and historical returns.
5. Property condition reports
Requirement:
A streamlined property condition assessment (PCA) is required during underwriting to identify any necessary immediate repair items and determine an overall condition rating of your property.
Takeaway:
While a streamlined PCA ensures your lender that any life safety or significant deferred maintenance issues are addressed and verifies the overall quality of their collateral, it can also help you identify any unforeseen issues.
This is especially important for small multifamily properties, which tend to be older than average – over 80% of 5–49-unit properties are greater than 20 years old vs. 69% of 50+ unit properties[2] – and can have greater repair needs and costs.
In today’s environment, repair and improvement costs should be a strong consideration now more than ever, as labor shortages and supply issues have significantly increased the costs of materials and labor.
According to HomeAdvisor’s 2021 True Cost Report, the cost of improvement projects have increased considerably over the past year. Here are a few examples:
While there has been some reprieve in material costs, including a 38% drop in the cost of lumber which peaked in May 2021, the costs of overall residential construction goods are still 20% higher than pre-pandemic levels.[3]
In summary
Though lending program requirements may seem overwhelming, they can serve as a guide. If you already meet the Fannie Mae and Freddie Mac small loan program requirements described here and are ready forfinancing, connect with our team of expert MultiFi partners to get a quote today!
Have questions or feedback? Contact us.
[1] Source: Freddie Mac Multifamily Seller/Servicer Guide
[2] Source: ACS 1-Year Estimates 1-Year Estimates-Public Use Microdata Sample 2019
[3] Source: U.S. Bureau of Labor Statistics
Chris Philipps
With nearly 15 years of experience in finance, commercial real estate, and multifamily lending, Chris leads our MultiFi team to provide the best solutions tailored to your unique situation and goals. Chris and the MultiFi team have set out to create the future of multifamily lending, striving to empower borrowers like you with the knowledge, transparency, and expertise to get more out of your multifamily investment.
Prior to launching MultiFi, Chris was responsible for the initial underwriting and quoting of over $26 billion of potential Fannie Mae multifamily production. Chris was also instrumental in launching Berkadia’s Fannie Mae's Small Loans program and Freddie Mac’s Optigo® Small Balance Loans Program. He served as Head of Small Loan Originations, where he managed over $575 million in small loan production, in conjunction with being the Product Manager for Berkadia's multifamily lending technology initiative. Chris's unmatched experience with multifamily financing and innovation gives MultiFi an edge in providing you with the optimal solutions and experience.
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