Fannie Mae Apartment Loan Application Process
A Fannie Mae (“Fannie Mae” or FNMA) mortgage is a loan product for apartment buildings with 5+ units. These loans can be fixed or floating and are generally non-recourse. It is a great product for various multifamily property types, including conventional apartments, affordable housing, senior housing, student housing, cooperative housing, and manufactured housing. It can also be used for mixed-use buildings where the other commercial units make up 20% or less of the gross income. Fannie Mae loans are only available for experienced multifamily investor/managers.
The following are typical loan features of a Fannie Mae mortgage, but are subject to change depending on market conditions or regulatory changes:
|Recourse||Non-recourse, except for “bad boy” carve-outs|
|Term Length||3-30 years|
|Amortization||Up to 30 years|
|Interest-Only Period||Available in some circumstances|
|Prepayment Penalty||Yield maintenance or declining|
|Loan Assumption||Available with an underwriting and transfer fee|
|Loan Servicer||Originator, or may be transferred to a third party|
|Secondary financing||Yes, through the Fannie Supplemental Loan program|
Loan Application Process
The Fannie Mae process is very similar to the CMBS and Freddie Mac loan application processes since the mortgages are also pooled together and sold as bonds to investors. Because of this, there is usually a little more paperwork, longer loan documents, and more third party report requirements than a conventional mortgage, but the process isn’t prohibitive and well worth it for the right investor. Loans typically close 45-60 days after the application and deposit have been furnished to the lender.
Getting a Fannie Mae Quote/Application
In order to get a Fannie Mae rate quote and formal application, plan on submitting the following documents:
- Trailing 12 Month Operating Statement
- Current Rent Roll/Occupancy Report (with move-in and lease-end dates)
- Interior/Exterior Photos of the Property (or property website)
- Personal Financial Statement (including a schedule of real estate owned)
- Real Estate Resume (if only one multifamily property owned)
Keep in mind that every lender has slightly different requirements and some won’t give an indicative quote without receiving more information than what is listed above. It is also important to understand that the rate will fluctuate until it is locked (typically the day before or of closing) and is determined by not only the current corresponding treasury rate, but also by the spread (which may change) and satisfactory due diligence and third party reports. The rate can be locked ahead of time, but depending on how far in advance, it may involve paying a lofty financial price or a higher interest rate.
If you are in agreement regarding the rate that was quoted to you by the Fannie Mae Lender, the next step is for you to execute the application, pay your due diligence deposit (approximately $4,500-8,500 for small loans and $15,000 for DUS), and start assembling the diligence information needed to close your loan. Keep in mind that the deposit paid for the loan doesn’t include the legal costs for closing and securitizing the loan (which is typically another $8,000-12,000) as well as any origination fee. The diligence items usually include the following:
- Borrowing Entity Credit Authorization Form
- Borrowing Entity Financial Statement (within 12 months of commitment date)
- Borrowing Entity Liquidity Verification (prior (2) months bank/investment statements)
- Borrowing Entity Property Questionnaire
- Borrowing Entity Schedule of Real Estate
- Borrowing Entity Organizational Chart (with management structure and ownership percentages)
- Borrowing Entity Organizational Documents
Key Principal/Carve-Out Guarantor Documents
- Contingent Liabilities Statement
- Key Principal(s) Credit Authorization Form(s)
- Key Principal(s) Financial Statement (within 12 months of commitment date)
- Key Principal(s) Liquidity Verification (2 months bank/investment statements for each KP)
- Key Principal(s) Questionnaire
- Key Principal(s) Resume
- Key Principal(s) Schedule of Real Estate
- Key Principal Entity(s) Organizational Documents
Principal/Sponsor (Non-Guarantor) Documents
- Principal(s) Financial Statement (within 12 months of commitment date)
- Principal(s) Credit Authorization Form(s)
- Principal(s) Schedule of Real Estate
- Principal(s) Liquidity Verification (2 months bank/investment statements for each principal)
- Principal Entity(s) Organizational Documents
- Capital Improvements Schedule (completed in the last 3 years); include description, quantity and cost
- Insurance Authorization Form
- Trailing 12 month Operating Statement, including all income (rental, laundry, parking) and all expense details. Plan on sending monthly operating statements up to and including the month of closing.
- Year-to-Date & Prior 3 years Operating Statements; statements should include all income: rental, laundry, parking and all other expense details. Please continue to send monthly operating statements up to and including the month of closing.
- Pro-forma/Budget (for the next 12 months)
- Purchase and Sale Agreement (if an acquisition or purchased within the last 2 years)
- Real Estate Tax Bills (past 3 years and copy of the most recent assessment notice)
- Current Rent Roll (signed, certified and dated)
- Service/Vendor Contracts (landscaping, laundry, pest, etc.)
- Termite Report (dated within 90 days for existing properties or a bond for new construction)
- Title Insurance (Fannie Mae Compliant) Final Policy
- 1031 Exchange Documentation (if applicable)
Property Management Documents
- Standard Lease Agreement
- Management Agreement (executed)
- Management Company Resume
- Management Company Personnel List (position, part-time/full-time, current salary, rent concessions (if any), annual taxes & benefits, date of last pay increase)
- On-site Manager Resume (if applicable)
- Proposed Management Plan (any changes to current operations, and any planned capital improvements)
- Commercial Lease Agreements (cell tower, retail space, office space, etc.), if applicable. Also provide the certificate of insurance for each commercial tenant.
- Condominium Declaration/Agreement (if applicable)
- Ground Lease Agreement (if applicable)
- Rent Control/Increase Law (if applicable)
- Reciprocal Use/Easement Agreements (if applicable)
- Income/Rent Restrictions (HAP Contract, LURA, restrictions, etc.)
- Don’t be afraid to ask questions if you don’t understand.
- Stay on top of treasury index changes; if they drop substantially, you may want to consider advance rate locking if the fee isn’t too expensive.
- Ask for an estimate of potential legal costs up front and to be notified if/when that changes.
- Origination fees can sometimes be negotiated down.
- Disclose any potential credit issues up front (i.e. bankruptcy, foreclosure, short sale, liens, judgments, charge-offs, etc.) on the borrowing entity, sponsors, or sponsor holdings. You don’t want to have paid thousands of dollars in deposits only to find out later you don’t qualify for the loan because of a previous credit issue (which WILL come out in the legal and/or credit searches).
- Make sure you separate out any one-time or capital expenses from the rest of your NOI in your operating statements so they aren’t included in regular expenses.
- Double-check the assumptions under which your pricing is given in the application. Sometimes lenders are too aggressive with their DSCR or LTV assumptions on their applications (especially if they haven’t completed the financial analysis), which can lead to you being re-traded later when the numbers are finalized. Make sure they are comfortable with the NOI they have calculated and ask how much of a buffer you have with the DSCR and LTV before you get bumped up to the next higher pricing bracket. Also, ask what kind of cap rate they assumed on your property for the LTV and where they pulled it from, then double check that number with a local real estate broker to make sure it’s in the realm of possibility.
- If you are asking for cash out, make sure you have legitimate commercial uses for the money that you are asking for above the refinance costs and loan payoff.
- Understand that although there are some loan document points that can be negotiated, there are many items in the loan documents that cannot be negotiated or changed because they are put there to protect the bond investors, which end up holding the loan after it is sold. In order to change anything on the loan documents, you will need Fannie Mae to sign a waiver, which could delay the loan closing 2-4 weeks.
- If you know of properties that are comparable to yours and reflect the value that you need for your property (especially if they are recent sales), make sure to put those comparables in a list (as well as any info you have on them), and supply them to the appraiser when he comes for the site visit to assess your property. Also make sure you casually mention the value you need to be at. Although not guaranteed, both of these tactics may help reduce some of the risk of the appraisal number coming back lower that what is needed.
- Get your items in quickly. It helps reduce the risk of the interest rates climbing on you while you’re waiting to close.
- Because the standard prepayment penalty on this loan product (yield maintenance) can be very expensive if the loan is paid off too early, only choose this loan product if you:» Are planning on paying off the loan at the time of maturity» Have attractive enough financing that someone will want to assume it in the future» Pay for the declining prepayment penalty» Plan on prepaying/refinancing close to the maturity date
- Get more than one Fannie quote and pick the lender you feel most comfortable with, but make sure the parameters for the quote are similar (i.e. LTV, DSCR, etc.).
About the AuthorLeanne Eicoff
Leanne is a JD/MBA and works as a Managing Director for Commercial Loan Direct, specializing in large balance transactions, portfolio loans, and complex financing structures. When not negotiating the best deals for her clients, you can find Leanne in the yoga studio or snowboarding up in the Rockies.