- Commercial residential real estate properties are all unique, and many times they require a uniquely customized loan. Fannie Mae DUS loans are one of the most flexible (and fastest) ways to borrow for multifamily property acquisition or refinance. Here's what you can expect if applying for one of these loans through a DUS lender.
Advantages of Fannie Mae DUS Loans
- Flexibility: The most significant benefit of DUS loans is the flexibility that lenders have, and the resulting flexibility that the loans themselves can actually have. Borrowers can get long-term, fixed-rate primary loans when rates are especially attractive, or they can get ballooning adjustable or interest-only loans for short-term holdings.
There is also great flexibility in what properties qualify, with eligible properties spanning property type (e.g. apartments, townhomes, mobile homes), tenant type (e.g. senior, student, affordable housing) and amount (e.g. $2 million, $100 million).
- Speed: Since the loan is handled entirely by one bank, underwriting can be processed faster than many other Fannie Mae, Freddie Mac and SBA loans. Not only are straightforward loans processed faster, but processing may be minimally impacted if an issue arises during underwriting.
- Assumable: DUS loans are assumable, provided the new borrower receives lender approval. While many other Fannie Mae and Freddie Mac loan programs are also assumable, but Fannie DUS program doesn’t have stringent requirements that new borrowers must meet.
- Non-Recourse: Borrowers usually can’t be held personally responsible for loans since they’re non-recourse (provided borrowers don’t violate the bad-boy carveouts).
Disadvantages of Fannie Mae DUS Loans
- Prepayment Penalty: The prepayment penalty is somewhat standard for commercial real estate lending, but it’s higher than what some other specialized programs have. Borrowers can avoid prepayment issues by considering their intended payoff time frame and structuring a loan accordingly.
- Balloon Payments: Balloon payments aren’t a feature of all DUS loans, but many of these loans have a balloon payment. Borrowers should carefully consider the time frame they have for unloading a property or refinancing, so they can afford any balloon payment. Alternatively, borrowers can limit their search to non-ballooning DUS loans.
- Purchase/Refinance Only: DUS loans aren’t available for new construction or major renovation. DUS lenders can only provide these loans for the purchase or refinance of an existing property that’s not in need of major repair.
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What Are Fannie Mae DUS Loans?
DUS Fannie Mae offers loan properties where 35% of space that can be filled by commercial tenants, but that's capped at 20% of rental income. DUS loans for multifamily properties require a large student or military population with up to eighty percent allowed. But if for any reason, your concentration of military or student population goes over 80%, you must start using Fannie Mae's military or student housing program.
Your loan size minimum is $3 million; although there is no upper limit, you do have to have at least a five-unit multifamily housing building or property. You can leverage 80% maximum of your LTV allowance, and usually, Mezzanine financing is available. There is a non-recourse standard, but there are rate locks both secure and extended, and the Debt Service Coverage Ratio (DSCR) is a minimum of 1.25.
It is your DSCR that is often the number one criteria used in analyzing your risk level for investment purposes for your business or property loans.
What Does DUS Stand For?
DUS is shorthand for “delegated underwriting and servicing.” Fannie Mae might manage the overall program, but all aspects of underwriting, originating and servicing loans are taken care of by the banks that provide these loans.
What Commercial Properties Are Fannie Mae DUS Loans Well-Suited For?
Because DUS lenders have substantial flexibility when structuring DUS loans, these loans can be suitable for almost any multifamily property (5+ units). This is one of the most used Fannie Mae loan programs for large residential properties.
Investors can use DUS loans to finance affordable housing, senior housing, student housing and manufactured housing properties. Apartments, townhomes, condominiums mixed-use and co-ops may all qualify. Other properties may qualify depending on the specifics of the situation.
(Properties with homeowners associations, fractured ownership condominiums, non-continuous townhouses, new construction and healthcare properties typically don’t qualify. These may be financed through another loan program, though.)
Moreover, the loans can be used to finance the acquisition of these properties or used to restructure an existing loan(s) through refinance.
What Features Do Fannie Mae DUS Loans Come With?
The flexibility that underwriters have results in DUS loans offering diverse terms. This is largely why they’re used for many properties -- the terms can be adjusted to a specific property and borrower:
Borrowing amounts usually start around $2 to $6 million, and they can go up to $100 for qualifying borrowers. The upper $100 million isn’t necessarily a hard cutoff.
Loans can be for anywhere from 5 to 30 years, and they can have fixed, variable or hybrid rates. Many have balloon payments, but non-balloon options are available.
Maximum loan-to-value (LTV) is 80% for most loans. Minimum DSCR is around 1.25x, and most require 85% physical occupancy and 80% economic occupancy.
Prepayment penalty might be structured as a 1% penalty, yield maintenance, or the higher of the two.
Most loans are non-recourse with the standard bad boy carveouts.
Borrowers must be U.S.-based, and the minimum credit score is often around 680. Again, that’s not necessarily a hard cutoff.
Rates are determined in-house, but are generally competitive with the current market rates.