The Charter of Fannie Mae and Freddie Mac
Lance Edwards recently hosted Geoffrey Platt, VP Originator of Arbor Realty Trust, and Mr. Platt spoke about the common purposes and detailed differences of the government sponsored loan enterprises Fannie Mae and Freddie Mac. The Fed’s rates show a trend of going up rather than down. Generally speaking, the rates on a 10 year term which is our most popular term or range is anywhere from 5.25% to 5.75%. The reason why it gives such a wide range is that both Fannie Mae and Freddie Mac compete with one another. The way they do this is by the affordability program and the charter of both programs to provide workforce housing, not “affordable housing.”
Freddie Mac has a very customizable program where you can really customize what you want and get that rate and terms nailed down. Like, say you only want one year of IO, 70 LTV, with a seven year term and a step down of five, four, three, two, one. We’re able to pinpoint and get you that discount, say four or ten bits off. If you step down a bit, that will cost you an extra 10 bits but we’ll be able to customize that. Fannie Mae is a little more specific about these things.
Qualifying for Agency Loans
Lance Edwards recently hosted Geoffrey Platt, VP Originator of Arbor Realty Trust, and Mr. Platt spoke about the qualifications for agency loans. Once you do your first agency loan, you’re qualified as an agency client, which is huge. The first requirement is credit score. Fannie Mae’s required minimum credit score on a Fannie Mae small loan is 680; on Freddie Mac, the minimum credit score is 650. So that’s the first thing that you have to have. Next, they typically require at least two years of multi-family ownership/management experience. If you do not have that, they require that the property is third party managed – meaning a professional third party management company is going to manage the asset.
A bit more about that second qualification. Often, we’ll see that people want to graduate from owning duplexes or single family homes and they’ll say they want to buy a seven unit property and take out on agency loan. I have to tell them I am sorry, because you only have experience managing duplexes and single family residences. The agencies don’t recognize that as multi-family experience. Some get upset about that and I have to inform them that they need to get a third party management company on board. When they say “multi-family,” it means five units or greater at a single property – not their total portfolio but at a single location.
The next major requirement is your net worth. The minimum net worth must be equal to or greater than the loan amount that you’re applying for. So if you’re looking for a million dollar loan amount you must show a million or greater net worth. Then there’s liquidity. You need to show liquidity that’s generally greater than twelve months of principal and interest on the loan you’re applying for. There’s some leeway there. But usually we like to see greater than 12 months of principal and interest on the applied loan. Now we can switch gears to the loan itself. All small loans need what we call 90 for 90. They need at least 90 percent physical occupancy for 90 days prior to closing. That’s a major requirement on all on both agencies Fannie Mae and Freddie Mac.
Here’s a bit of good news. You can bring in a partner as part of the underwriting process that helps you meet the net worth and liquidity requirement. The only stipulation is that the partner has to have an ownership stake in the deal and has to sign the loan docs.