What is a Freddie Mac Apartment Loan?
Published 09-29-2018


Freddie Mac Apartment Loans

The Federal Home Loan Mortgage Corporation (“Freddie Mac” or FHLMC) has multifamily mortgage products available for conventional (“market-rate”) properties, seniors housing, student housing, cooperative and targeted affordable housing. Through it’s various programs, Freddie Mac offers mortgages to experienced multifamily investors that focus on low- to median-income tenants. Like CMBS and Fannie Mae loans, these mortgages are pooled, securitized, and sold to investors.

Loan Features

Structures Fixed-Rate, Floating-to-Fixed Rate (2+7), and Floating-Rate
Recourse Non-recourse except for “bad boy” carve-outs
Interest-Only Period Available on fixed and floating product, first 2 years on floating-to-fixed
Prepayment Penalty Yield maintenance or defeasance for large Freddie loans, yield maintenance or declining for small balance loans
Loan Assumption Available, with pre-approval and assumption fee
Rate Lock Available Yes, Freddie Mac has various rate lock options, up to 120 days before closing
Loan Servicer Originator, or may be transferred to a third party
Secondary financing Yes, subject to requirements specified in the Loan Agreement
Insurance & Tax Reserve Generally required (exception: small balance loans)
Capital Reserves Generally required (exception: low-leverage small balance loans)

Loan Pricing

Freddie Mac loans are priced based on the corresponding treasury and a spread, which takes into account the loan amount, term, LTV, and property location. Pricing considerations the borrower should be aware of are the following:

  • Usually the longer the term, the higher the rate
  • Discounts are given for “green” properties
  • Discounts are given to properties in primary MSAs
  • Floating-to-Fixed loans are priced using the following metrics (subject to market changes
    » Floating rate: LIBOR + 300 bps (net spread) » Fixed rate: 7-year fixed pricing + 50 bps
  • Yield maintenance prepayment penalty (for larger Freddie loans of $5,000,000+) option adds spread to the rate or incurs additional fees
  • Discounts may be given for certain low-income properties

Small Balance Loan Characteristics

Eligible Properties Conventional apartments Affordable housing Cooperative housing
Loan Amount $1,000,000 – $5,000,000
Loan Terms 5-20 years, up to 10 years fixed
Amortization Up to 30 years
Minimum DSCR Depends on leverage
Interest-Only Part- or full-term available
Prepayment Penalty Yield maintenance & declining
Rate Lock Yes, for 60-120 days with additional fee

Fixed Rate Product Characteristics

Eligible Properties Conventional apartments Affordable housing Seniors housing Cooperative housing Targeted Affordable housing (i.e. LIHTC Year 4-10/11-15, Section 8)) Student housing
Loan Amount $5,000,000 – $100,000,000 (larger and smaller loans considered on exception basis)
Loan Terms 5-10 years (unless not securitized, then up to 30)
Minimum DSCR 1.25x (depends on underwriting)
Interest-Only Part- or full-term on fixed-rate products
Prepayment Penalty Yield maintenance or defeasance with 2 year lock-out
Rate Lock Yes, for 60-120 days with additional fee
Application Fee Greater of $2,000 or 0.1% of loan amount

Floating-to-Fixed Rate Product Characteristics

Eligible Properties Conventional apartments Affordable housing Targeted Affordable housing Cooperative housing
Loan Amount $5,000,000 – $50,000,000
Loan Terms 2 years floating, then 7 years fixed
Amortization Up to 30 years
Minimum DSCR Must pass Refinance Test using aggregated term (2 years floating plus 7 years fixed) with 2 years of interest-only
Prepayment Penalty Yield maintenance or defeasance with 2 year lock-out
Rate Lock Not available for this product
Application Fee Greater of $2,000 or 0.1% of loan amount

 Floating-Rate Loan Characteristics

Eligible Properties Conventional apartments Affordable housing / Targeted Affordable Housing Seniors housing Student housing
Loan Amount $5,000,000 – $100,000,000 (larger and smaller loans considered on exception basis)
Loan Terms 5-10 years
Amortization Up to 30 years
Minimum DSCR 1.25x (depends on underwriting)
Interest-Only Part- or full-term on floating-rate products
Interest Rate Caps Borrower may obtain coverage from a third-party provider approved with Freddie Mac
Prepayment Penalty Declining with 1-2 year lock-out (various options available)
Rate Lock Yes, for 60-120 days with additional fee
Application Fee Greater of $2,000 or 0.1% of loan amount

Property Requirements

Property Type Conventional apartments Affordable housing Seniors housing Cooperative housing Manufactured housing Student housing
Location Primary or secondary MSAs (populations of 200,000+); tertiary on a very limited basis
Occupancy 90% for at least 90 days before closing on stabilized properties; 85%+ for at least 90 days on newly constructed or rehabbed properties
Units 5+ units
Loan amount $1,000,000 – $100,000,000
Financials Stable NOI (excluding unusual expenses)
Leases 12-month leases; parental guarantees for student housing

Borrower Requirements

Experience Required
Net worth 1.0x loan amount requested, unless waiver granted
Liquidity 9 months debt service (after any required cash injections)
Credit No recent bankruptcies, foreclosures, short sales, etc.
Structure Single-Purpose Entity formed as a LP, Corporation, LLC, or TIC (with 10 or fewer tenants in common); GPs, LLPs, REITs, and certain trusts acceptable with additional requirements.

Loan Underwriting

80% 80% for purchases, 75% for refinances (dependent on cash flow)
Term length 5-10 years (securitized); up to 30 years (non-securitized)
Maximum amortization 30 years (dependent on property location and age)
Minimum DSCR 1.25x (depending on leverage and if interest-only period)
Third party reports required Appraisal, environmental, structural engineering/property needs assessment, seismic zoning (if in areas within certain vicinity of fault lines)

Funding/Securitization Process

Freddie Mac securitizes its loans into bonds through what it calls a “K-deal” structure. Mortgage loans are underwritten, priced, and structured through Freddie’s Capital Markets Execution (CME) product, then are pooled and sold as commercial mortgage-backed securities. The securitized pool includes senior bonds guaranteed by Freddie Mac and subordinate bonds that are held by private investors who bear the risk of initial losses (i.e. are in the “first-loss position”). The senior bonds guaranteed by Freddie carry the equivalent of a AAA rating based on the quality of the underlying collateral. The unguaranteed mezzanine and subordinate bonds (about 15% of all of the bonds) sold to the private capital investors accounts for the majority of the risk. Each K-Deal represents about $1.2 billion in multifamily mortgage loans.

 Post-Closing/Servicing

Typically serviced by the originator/underwriter, but may be transferred to third parties.


Author: Leanne Eicoff

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