Does Your Apartment Deal Qualify For Agency Debt?
One of the most sought after loan programs by apartment investors and apartment syndicators alike is agency debt. That is, a loan secured from either Fannie Mae or Freddie Mac.
Fannie Mae and Freddie Mac loan programs generally have better, more competitive terms (i.e., interest rates, loan length, interest-only payments, etc.) compared to other common loan programs offered through your traditional banks or bridge loan lenders.
If you want to secure Fannie Mae or Freddie Mac debt, you not only need to find a deal that meets their loan requirements, but you as the borrower will also need to meet their experience requirements.
Here are the five questions you need to answer, which will determine whether you and your deal will qualify for Fannie Mae or Freddie Mac agency debt:
1. What is The Purchase Price?
The price at which you’re purchasing the asset will determine if your deal exceeds Fannie Mae’s or Freddie Mac’s minimum loan amounts and is below the maximum loan amounts.
If you are pursuing a non-rehab loan, the minimum loan amount is $750,000. To determine the minimum purchase price, you need to divided the minimum loan amount by the maximum loan-to-value (LTV) offered, which is 80%. Therefore, if the purchase price is less than $937,500 (i.e., a loan less than $750,000), the deal will not qualify for Fannie Mae or Freddie Mac debt. If the purchase price is greater than $937,500, the deal may potentially qualify for agency debt – assuming the other requirements outlined in the next sections are met.
The agencies also have a maximum amount of money they are willing to loan. Freddie Mac has a $100 million cap on the amount of money they will loan for a non-rehab project, which means the purchase price must be below $125 million. Whereas Fannie Mae is more flexible with $100 million plus loans.
If you are pursuing a rehab loan, the minimum loan amount is $10,000,000 with no maximum and the maximum LTC is 80% for Fannie Mae. Therefore, the purchase price plus total project costs must exceed $12,500,000 in order to potential qualify for a Fannie Mae rehab loan. Freddie Mac is more flexible with their rehab loans and base the loan amount on the LTC (up to 85%) and debt service coverage ratio (DSCR).
2. What is the DSCR?
The debt service coverage ratio (DSCR) is calculated by dividing the debt service by the current net operating income. If you know the DSCR and current net operating income, you can calculate the debt service (debt service = current net operating income / DSCR). Both Fannie Mae and Freddie Mac have minimum debt service coverage ratio requirements, which essentially mean that the deal needs to exceed a certain net operating income level to qualify for agency debt. If the net operating income is too low, you will likely need to put down a lot of money to qualify, which will likely reduce the returns to the point where the deal won’t make sense.
If you are pursuing a non-rehab loan, the minimum DSCR for Fannie Mae is 1.25. That is, the current net operating income must be at least 25% greater than the debt service. The minimum DSCR for Freddie Mac varies based on the market:
- Top markets: 1.20 DSCR
- Standard markets: 1.25 DSCR
- Small markets: 1.30 DSCR
- Very small markets: 1.40 DSCR
If you are pursuing a rehab loan, the minimum DSCR is 1.25 for Fannie Mae and 1.10 for Freddie Mac.
3. What are The Occupancy Rates?
Physical occupancy is the rate of occupied units and economic occupancy is the rate of paying residents. If the physical occupancy rate is less than 85% and/or the economic occupancy rate is less than 80% ninety days before the closing date, the deal will not qualify for agency debt.
However, Fannie Mae and Freddie Mac do not take occupancy levels into account for their rehab loan programs.
4. What are The Renovation Costs?
In order to qualify for a renovation loan through Fannie Mae and Freddie Mac, the per unit cost must exceed their minimum amounts and must not exceed their maximum amounts.
If the per unit cost to rehab the apartment deal is less than $10,000 or greater than $60,000 per unit, which includes interior and exterior capital expenditure projects, the deal will not qualify for a rehab agency loan.
5. What is Your Experience?
In order to qualify for Fannie Mae or Freddie Mac debt, you or someone else signing on the loan must have previous multifamily experience.
If you are pursuing a non-rehab loan, you must have a strong track record in the multifamily industry (although, some exceptions are made if you are a local owner). Additionally, the person or people signing on the loan must have a net worth equal to the loan amount and liquidity equal to 9 months of debt service.
If you are pursuing a rehab loan, you must have a strong track record in multifamily rehabilitation.
Above at the minimum requirements to qualify for Fannie Mae or Freddie Mac debt. However, is you and the deal meet all of the above requirements, it doesn’t mean you will qualify for all agency loan programs. The purpose of this blog post is to give you an idea of whether you will qualify for one of the Fannie Mae or Freddie Mac loan programs. If you and the deal meet all of the above requirements, the next step is to contact a commercial mortgage broker to discuss your options.
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Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.