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Ultimate guide to Form 1115 when financing your small multifamily property with Freddie Mac

You’ve heard the famous expression before: “Money makes the world go round” and I’m willing to bet that you, the borrower, would agree with that. At the end of the day, you want your money as quickly as possible to close on your transaction, payoff an existing debt, or cash out built-up equity.

Money, of course, is important to the lender as well. A lender wants to place their capital quickly, but needs to make sure there is a guarantee, when the time comes, for the borrower to pay them back. 

Filling out a loan application, and any subsequent forms, completely and accurately is beneficial to both the borrower and the lender. This is especially the case for Form 1115, which is required when financing your multifamily property with Freddie Mac Small Balance Loans (SBL).

 


 
 

What is Freddie Mac SBL’s Form 1115?

Form 1115, also known as the Borrower and Borrower Principal Certificate, serves as an instrumental source disclosure document for prefunding credit decisions and post funding accountability.

Yes, I know just reading that may seem overwhelming, especially to someone who is new to multifamily investing, but it doesn’t have to be. Let’s explore further.

 

What purpose does it serve?

Form 1115 provides Freddie Mac with the following insights related to the borrower or borrower principals:

  • Who are the sponsor(s)?
  • Were they at all dishonest in providing their personal information and financial status?
  • Were they ever foreclosed on or caused a lender to incur losses?
  • Have they engaged in, or are they currently engaged in, any criminal or fraudulent activities?
  • Do they have multiple judgements currently or have a history of multiple active judgements?
  • Do they have active litigations or have a long list of past litigations?
  • Do they meet the minimum net worth and liquidity requirements to act as guarantors for the loan?

By leveraging Form 1115, Freddie Mac can answer the following questions to properly assess any borrower-related credit risks and mitigating factors:

  • Are you and the associated borrowers someone Freddie Mac wants to do business with?
  • Can you manage the financial responsibilities of the proposed loan?
  • Is this a sound investment for Freddie Mac and for the sponsors?

 

What information does a borrower need to provide?

Throughout the entire loan process, there are only a few places where information is requested specifically about the borrower and borrower principals. Form 1115 happens to be one of those places.

Form 1115 is intended to collect the borrower’s personal information and credit history. This disclosure is a direct verification from the borrower and borrower principals of material, unique personal identifying information, financial statements, mortgage history, and litigation exposure.

 

Specific information requested on Form 1115

Borrower and borrower principals are required to provide the following information:

 

Personal Identifiable Information:
  • legal name
  • address
  • citizenship status
  • ownership percentage
  • tax identification number
  • state of formation

Current financial condition:
  • estimated current net worth
  • liquidity
  • additional contingent liabilities not previously disclosed on financial statements

Past and current criminal and credit history (including foreclosures):
  • mortgage payment and default experience
  • history of criminal and/or administrative proceedings

 

Additional details requested on Form 1115

Borrower and borrower principals are also required to disclose and verify key material identification factors needed for underwriting due diligence.

Some of the specific pieces of information requested include:

  • What iteration of their names do the borrower and borrower principals go by?
  • What are their current principal residential addresses?
  • Are they U.S. based citizens or entities?

Why is the 1115 so important?

Freddie Mac heavily relies on Form 1115 as an important reference document to underwrite and ultimately determine loan approval. It is vital for assessing whether the borrower and borrower principals are creditworthy and have the financial wherewithal to repay the requested debt obligation.

 

Underwriting

Underwriters utilize the information provided in Form 1115 to conduct their full due diligence, which involves running official background checks for material credit liabilities. If any of the information represented on Form 1115 is discovered to be inaccurate, it can significantly delay funding or result in the loan being declined.

 

Loan defaults 

If the borrower or borrower principals intentionally or unintentionally misrepresented any material facts that resulted in the approval and funding of the loan, and then later default, Freddie Mac depends on the information disclosed on Form 1115 as important evidence to rightfully foreclose and repossess the underlying collateral (i.e. the property).The borrower and borrower principals may also be held personally liable for any of the lender’s losses that incur due to any such malfeasance or so called "bad boy" acts.

 

In summary

Form 1115 is a vital piece of Freddie Mac’s loan approval process and filling it out, as completely and accurately as possible, will help eliminate delays and provide the most protection to both the borrower and the lender. As with any critical loan document, it is important to have the right people in your corner to provide you with the proper guidance.

 


 

Our MultiFi team is comprised of experts who know this form like the back of their hand and can help you navigate the entire financing process with ease.

Connect with us today!

 

Credits:

Thank you to my good friend and colleague, Dewey Nguyen, a real estate finance attorney who specializes in Fannie Mae and Freddie Mac loans for his insights on this piece. 

 

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