Freddie Mac Apartment Loan Application Process
Freddie Mac Apartment Loan Overview
A Federal Home Loan Mortgage Corporation (“Freddie Mac” or FHLMC) mortgage is a non-recourse loan product for multifamily properties with 5+ units. These loans can be fixed, floating, or a hybrid of both, with interest-only periods available. It is for various multifamily property types, including conventional apartments, affordable housing (tax-exempt and taxable), seniors housing, student housing, cooperative housing, and manufactured housing. Freddie Mac loans are only available for experienced multifamily investor/managers.
Loan Application Process
The Freddie Mac due diligence and closing process is very similar to the Fannie Mae and CMBS processes since all three have loans that are pooled together and sold as bonds to investors. Because of the legal requirements for securitization, there is more paperwork, documentation, and diligence requirements than a conventional mortgage, but the process isn’t prohibitive and well worth it for the right investor. Loans typically close 45-90 days after the application and deposit have been returned to the lender.
Getting a Quote/Application
In order to get a Freddie Mac multifamily rate quote and 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)
Although Freddie has standardized requirements for approving and closing the loan, the lenders may have varying requirements for what they request for issuing an application. Also, the rate will fluctuate until it is locked (typically the day before or of closing unless an Early Rate Lock is selected) and is determined by not only the current corresponding treasury rate, but also by the spread (which may change), and satisfactory due diligence analysis and third party reports.
If you are in agreement regarding the rate that was quoted to you by the lender, the next step is for you to execute the application, pay your due diligence deposit (approximately $2,500-5,500 for small loans and $15,000 for standard loans), 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 $5,000-10,000) as well as any origination fee or Freddie Mac fee (greater of $2,000 or 0.1% of the loan on standard loans).
The diligence items usually include the following:
- Borrowing Entity Certified Financial Statement (dated within 12 months of commitment date)
- Borrowing Entity Liquidity Verification (prior (2) months bank/investment statements)
- Borrowing Entity Organizational Documents
- Borrowing Entity Credit Authorization
- Borrowing Entity Certification (Form 1115)
- Borrowing Entity Certification of Property – Physical & Environmental Condition (Form 1117); only if early rate lock
- Borrowing Entity Schedule of Real Estate (Form 1116)
Key Principal/Carve-Out Guarantor Documents
- Credit Authorization Form(s)
- Certified Financial Statement (within 12 months of commitment date)
- Liquidity Verification (2 months bank/investment statements for each KP)
- Real Estate Resume
- Guarantor’s Certification (Form 1117)
- Schedule of Real Estate (Form 1116)
Principal/Sponsor (Non-Guarantor) Documents
- Organizational Documents
- Principal’s Certification (Form 1115)
- Schedule of Real Estate (Form 1116)
- Credit Authorization Form(s)
- Capital Improvements Budget (planned in the next 12 months); include description, quantity and cost
- Capital Improvements Schedule (completed in the last 3 years); include description, quantity and cost
- Certificate(s) of Occupancy
- Commercial Leases (cell tower, retail space, office space, etc.)
- Insurance Authorization Form
- 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)
- Payoff Letter from Current Lender (some lenders require a specific time of
- Title Insurance Policy
- Verification of Collections (Freddie Mac Form 1144); only if trailing 12-month operating statement not available
- 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. Continue to send monthly operating statements up to and including the month of closing.
- Pro-forma/Budget (for the next 12 months)
- Existing O&M Plans
- Zoning and Rebuildability Letter
- 1031 Exchange Documentation (if applicable)
Property Management Documents
- 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)
- Condominium Declaration/Agreement (if applicable)
- Rent Control/Increase Law (if applicable)
- Income/Rent Restriction Documents (HAP Contract, LURA, restrictions, etc.)
Freddie Mac Apartment Loan Features
|Recourse||Non-recourse, except for “bad boy” carve-outs|
|Term Length||5-30 years|
|Amortization||Up to 30 years|
|Interest-Only Period||Available on most products|
|Prepayment Penalty||Yield maintenance, defeasance, 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 Freddie Supplemental Loan program|
Loan Application Tips
- 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 rate locking early if the fee isn’t too expensive.
- Non-agency 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.
- If you are asking for cash out, make sure you have legitimate commercial uses (and a schedule for sources and 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 Freddie Mac 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.
- Make sure your prepayment penalty structure matches your investment strategy (i.e. don’t choose a defeasance prepayment penalty if you’re planning on selling the property in the next couple of years)
- Get more than one Freddie 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.