Fannie Mae and Freddie Mac’s Supplemental Loan Programs
This month on the StackSource blog, we’re going to talk more about agency financing for multifamily assets, particularly from the two gorillas: Fannie Mae and Freddie Mac. Despite rumblings of change coming to the government-sponsored entities that are still technically in conservatorship since the Great Recession, each agency is continuing their prolonged binge on multifamily loans.
Their appetite for these loans is so great, that each agency not only offers permanent financing through a plethora of fixed and floating rate programs, but each also offers a Supplemental Loan program that allows borrowers to top-up their loan proceeds at least 12 months after taking out their original loan.
Let’s say you purchased a multifamily asset a couple of years ago, and got an agency loan with a 10-year term. The property has performed extremely well since you’ve acquired it, and you’ve been able to increase the net operating income, and also see some nice appreciation. In short, you’re ready to take some cash out and put it to work elsewhere. You’re still several years away from your loan maturity, and there’s a prepayment penalty if you refinance this early. What do you do?
Well, both Fannie and Freddie have these “supplemental loan” programs for exactly this purpose — to help you increase your total LTV without refinancing.
Freddie Mac Supplemental
In order to qualify for a supplemental loan with Freddie Mac, you must have an existing Freddie Mac multifamily commercial mortgage in place, in good standing, seasoned for at least 12 months. The minimum supplemental amount is $1,000,000, so it’s not usually a fit for small-balance borrowers.
The supplemental program can be applied in either a refinance or during an acquisition where the buyer is assuming the first mortgage, rather than seeking outside financing. In that case, the buyer must be approved as per Freddie Mac guidelines. Either way, a real estate tax reserve will need to be set up, even if your original Freddie loan didn’t require it.
Freddie Mac applies a proprietary “Refinance Test” underwriting during the supplemental loan application, which is based on the total amount of debt service due and unpaid principal balance for the combined debt. The amount of total leverage available varies between 65% up to 80% LTV based on loan terms.
Fannie Mae Supplemental
Fannie’s supplemental loan program has many similarities to Freddie’s. One difference is that that there are options for the financing to be non-coterminous with the existing senior loan. Leverage will go up to 75%, but will also be constrained by debt service coverage of at least 1.3x. Because Fannie Mae’s loan terms go up to 30 years, the supplemental loan can also be extended to a 30 year term.
How to get supplemental financing
To secure supplemental financing, you need to work with your existing agency loan servicer, which is most likely the lender that originated your agency loan. Each agency servicer will have a slightly different quote and application process, but a borrower will typically know what to expect since they’ve already received the senior loan from the servicer in most cases (except for assumption).
These supplemental loans are not an option from mortgage brokers or platforms like StackSource, but our Capital Advisors can help you assess whether the supplemental loan is the best option for your investment vs a straight refinance or other options to increase leverage and maximize investment returns.