How Does the Fannie Mae Small Mortgage Loan Program Work?

How Does Fannie Mae's Small Mortgage Loan Program Work?

The Fannie Mae Small Mortgage Loan Program is designed to offer flexible, competitive financing options for smaller multifamily properties. This program provides liquidity to owners and investors of small rental properties, typically with loan amounts ranging from $1 million to $6 million (though this range can vary by market). It’s a popular choice for multifamily investors looking to finance affordable housing or workforce housing properties.

Here’s how the program works, along with its key features, benefits, and eligibility criteria.

Features of the Fannie Mae Small Mortgage Loan Program:

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Eligibility Requirements:

1. Property Type:
   The program is intended for multifamily properties with 5+ units. It covers a range of asset types, including:
   • Market-rate apartments
   • Affordable housing
   • Workforce housing
   • Manufactured housing communities (MHCs)
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2. Property Condition:
   Properties must meet minimum physical standards. An inspection is usually required to ensure the property is in good condition and meets Fannie Mae’s guidelines for safety and habitability.
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3. Borrower Requirements:
   • Borrower experience in managing multifamily properties is preferred.
   • Net worth and liquidity requirements must be met. Typically, borrowers need to demonstrate a net worth equal to the loan amount and post-closing liquidity of at least 9 to 12 months of debt service payments.
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4. Occupancy Rate:
   Properties generally need to show a stabilized occupancy rate of at least 85% to 90% over the past 90 days.

Program Benefits:

1. Competitive Interest Rates: Fannie Mae small loans typically offer lower rates compared to other lenders. Rates can be fixed or floating, depending on the borrower’s preference.
2. Non-Recourse Financing: Borrowers are generally not personally liable for the loan, which means lenders can only pursue the property in case of default. This is a key advantage for multifamily investors.
3. Flexible Underwriting: The program allows for higher LTVs and lower DSCRs compared to conventional financing, making it easier to qualify for a loan.
4. Streamlined Process: The Fannie Mae Small Mortgage Loan Program is designed to close quickly, with less red tape and fewer documentation requirements than traditional loans.
5. Interest-Only Options: Borrowers can choose interest-only periods, which helps improve cash flow, especially during lease-up or repositioning.
6. Affordability Incentives: The program offers pricing discounts and preferential terms for properties that are deemed affordable or meet green building standards.

Steps to Obtain a Fannie Mae Small Loan:

1. Preliminary Assessment:
   Borrowers provide property financials, rent rolls, and occupancy rates to a Fannie Mae-approved lender for an initial assessment.
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2. Loan Application:
   The lender submits a formal loan application with required documentation, including:
   • Property operating statements
   • Rent rolls
   • Appraisals
   • Borrower financial statements
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3. Underwriting and Approval:
   The lender conducts a thorough underwriting review, including a property inspection, to ensure the loan meets Fannie Mae’s criteria.
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4. Loan Closing:
   Once the loan is approved, the lender handles the closing process, including signing loan documents and disbursing funds.

Loan Terms and Interest Rates:

The interest rate for a Fannie Mae small loan depends on:

• Loan term (5, 7, 10, or 30 years)
• LTV ratio
• DSCR
• Whether the property qualifies for affordability incentives or green building certification.

As of early 2025, typical rates range between 5.75% and 6.50% for fixed-rate loans, though rates can vary depending on the market and loan structure.

What Are the Risks?

While the program offers many benefits, there are some risks to consider:

1. Prepayment Penalties: Some loans come with yield maintenance or step-down prepayment penalties, which can be costly if the borrower wants to refinance or sell the property before the loan term ends.
2. Property Performance: The loan terms are based on property performance metrics such as occupancy rates, DSCR, and rent collections. Poor property performance can impact the borrower’s ability to secure favorable terms.

Affordable and Green Incentives:

Fannie Mae offers incentives for affordable housing properties and properties that meet green building standards:

• Green Rewards Program: Borrowers can receive better pricing and higher LTV allowances for properties that reduce energy and water consumption by at least 30%.
• Affordability Incentives: Properties that keep rents affordable for low- to moderate-income tenants can qualify for pricing discounts and preferential terms.

Who Should Consider This Program?

The Fannie Mae Small Mortgage Loan Program is ideal for:

• Small multifamily property owners looking to refinance or acquire additional properties.
• Investors seeking non-recourse financing with competitive rates and flexible terms.
• Owners of workforce or affordable housing properties who want to take advantage of incentive programs.