- Real estate investors need stable primary financing when they hold multifamily properties for medium and long terms. One of the most popular commercial real estate loans for this type of financing are Freddie Mac fixed-rate loans.
Freddie Mac Fixed Rate Loan Highlights
Loan Amount: Most loans are written for $5-$100 million, although these aren’t strict numbers. Smaller and larger loans are available on a case-by-case basis.
Interest Rate: The interest rate for all of these loans is fixed, according to current market rates. See current LIBOR rates.
Duration: Most of these loans are underwritten for 5-10 year terms. The loans can have terms of up to 30 years if they aren’t securitized.
Amortization: Amortization can be for up to 30 years, and interest-only options are available.
Maximum LTV: Range from 65-80%, depending on the term of the loan, and whether the loan is interest-only. The term breakpoint is 7 years, with loans that are less than 7 years vs. 7+ years having different allowed LTVs.
Minimum DSCR: 1.25 or 1.30, again depending on the duration of the loan. The cutoff for DSCRs is often less than 5 years vs. 5+ years.
Commercial Space: No more than 40% of the property’s income or 40% of the square footage can be from/for commercial tenants. This is subject to Freddie Mac’s determination.
Advantages of Freddie Mac Fixed Rate Loans
- Availability: Financing is available for many different multifamily properties thanks to the relaxed eligibility criteria.
- All Sizes: Available for multifamily properties of virtually all sizes and values.
- Fixed Rate: A good medium and long-term financing option because the fixed interest rate remains constant.
- Interest Only: Financing that’s interest-only can help maintain elevated cashflow
- Processing Time: tends to have faster processing timelines than more specialized programs, which require checking additional details
Disadvantages of Freddie Mac Fixed Rate Loans
- Not Subsidized: Doesn’t have subsidized rates or costs like some more specialized loan programs do.
- Interest Rates: Comes with competitive interest rates, but the rates aren’t as low as what variable-rate loans offer at the time.
- Prepayment Penalties: These tend to be higher than the penalties that other loans have
What Are Freddie Mac Fixed-Rate Loans?
Freddie Mac fixed-rate loans are characterized by the fixed interest rate that remains unchanged for the course of the mortgage. Other than the fixed interest rate, the other terms are quite flexible.
Because these loans have a fixed interest rate, they’re also referred to as Freddie Mac conventional loans. This is one of the most common loan types offered by the Federal Home Loan Mortgage Corporation (Freddie Mac).
What Buildings Are Eligible for Freddie Mac Fixed-Rate Financing?
The flexibility of Freddie Mac fixed-rate mortgages allows these loans to be used for many different multifamily property types. Standard multifamily housing, senior housing, student housing, manufactured housing, and housing cooperatives are all eligible.
Only multifamily housing properties are eligible, although a certain amount of mixed-use space is permitted. Properties must have at least five units (standard for multifamily commercial loans).
For buildings that don’t meet the stricter eligibility requirements of some specialized programs, the conventional loan program is one of the more popular and better of the less stringent options that are available.
What Can Freddie Mac Fixed-Rate Mortgages Be Used For?
Freddie Mac fixed-rate mortgages can be used to purchase or refinance properties. When refinancing, the loans can be structured independently of whatever financing a property currently has.
These loans usually can’t be used for new construction or renovation, as these projects aren’t compatible with the longer-term fixed-rate financing that these loans offer.
What Features Do Freddie Mac Fixed-Rate Loans Have?
The vast majority of Freddie Mac loans, including conventional fixed-rate Freddie Mac loans, come with a couple of standard features. These include:
Non-Recourse: The individual principals listed on a loan generally aren’t held personally liable for nonpayment or default (except for typical bad boy carve-outs).
Assumable: A prepayment penalty applies if the loan is repaid early, although the penalty is more complex than what some other loans have.
The prepayment penalty begins as a 2-year period of yield maintenance. If the loan is securitized during this time, the prepayment penalty shifts to defeasance. If the loan remains unsecuritized, the penalty continues to be yield maintenance. Some lenders offer a consistent yield maintenance penalty even if a loan is securitized, for an additional fee.
Can Investors Apply for Additional Financing After Securing a Freddie Mac Fixed-Rate Loan?
Freddie Mac fixed-rate loans allow for supplementary financing, whether through a standard or specialized supplemental loan program. Loans that provide funds for energy improvements, renovations, and major repairs can be secured after a Freddie Mac fixed-rate mortgage is in place.
Do Freddie Mac Fixed-Rate Loans Require Investors to Pay Into Escrow?
Most Freddie Mac fixed-rate mortgages require regular tax payments to be placed into escrow. Insurance might also have to be regularly paid into escrow.
Can Freddie Mac Fixed-Rate Loans Be Used for Mixed-Use Properties?
Freddie Mac fixed-rate mortgages allow for some mixed-use property. Generally, 40% of a property can be used for non-residential purposes, and the 40% limit applies to both space and rents.