The Freddie Mac Small Balance Loan

An increasingly popular multifamily financing solution for more moderately priced properties.

When it comes to multifamily financing, larger loans dominate the market space. However, there are quite a few scenarios that don’t require as much capital. In situations where smaller loan amounts are needed for a multifamily loan transaction, the Freddie Mac Small Balance Loan Program is a solid option. 

Freddie Mac has forever been the industry's most competitive source of financing for large multifamily loans, particularly loans north of $10 million, however, Fannie Mae always dominated the market under $10 million. In the last few years, Freddie Mac finally decided to get competitive in the small balance market, and their new product, the Freddie Mac Small Balance Loan, has been accepted with open arms.

One of the most substantial obstacles to originating small balance loans is the cost to the borrower. Third-party reports and lender legal don't vary much with the loan size, leaving fixed origination costs for a $1 million loan very similar to those of a $10 million loan. Freddie Mac has effectively addressed all these issues with a streamlined small balance loan program with substantially compressed fixed costs and rates as competitive as those for large loans.

Freddie Mac Small Balance Loans at a Glance:

  • Loan Amount:  $1 million minimum, $7.5 million maximum 

  • Loan Uses:  Acquisitions or refinances 

  • Loan Terms:  

    • A 20-year hybrid ARM with an initial 5, 7, or 10-year fixed-rate period

    • 5, 7, or 10-year fixed-rate loan

    • ARMs typically based on 6-month LIBOR with up to 1% rate adjustments every 6 months. Lifetime cap set 5% over the starting rate.

  • Amortization: Up to 30 years, partial interest-only options available, full-term interest-only options may also be available in certain circumstances. 

  • Interest Rates: Vary, but lower for properties in Top and Standard Markets and higher for properties in Small and Very Small Markets

  • Eligible Properties: 

    • Multifamily: 5+ unit market-rate multifamily properties. For loans larger than $6 million, properties with more than 100 units must be approved by Freddie Mac.

    • Non-Contiguous Properties: Allowed if within the same zip code and manageable as a single asset.

    • Occupancy: 90% for the previous 90 day period (exceptions down to 85% and down to 30 days for new construction in a Top Market). 85% occupancy may also apply to properties with 30+ units, or acquisitions with no history of serious crime, or that have been recently taken over by sophisticated management.

    • Mixed-Use: Restricted to no more than 40% non-residential income and no more than 40% of the net rentable area.

    • Affordable:

      • Low-Income Housing Tax Credit (LIHTC) properties with Land Use Restriction Agreements (LURAs) that are in either the final 24 months of the initial compliance period or the extended use period (investor must have exited for property to be eligible).

      • Properties with tenant-based housing vouchers and properties with local rent subsidies for 10% or fewer units where the subsidy is not contingent on the owner’s initial or ongoing certification of tenant eligibility are also eligible.

  • Ineligible:

    • Seniors housing with residential services

    • Student housing (greater than 25% concentration of “Student” Tenants)

    • Military housing (greater than 25% concentration)

    • Properties with Housing Assistance Program (HAP) Section 8 contracts and other project-based housing assistance payment contracts

    • LIHTC properties with LURAs in compliance years 1-12

    • Tax-exempt bonds Interest Reduction Payments (IRPs)

    • Historic Tax Credit (HTC) properties with a master lease structure