Advantages of working with a small balance multifamily lender

Agency multifamily loans carry strict requirements that leave many worthy investors out. Small balance bridge-to-agency loans can keep you moving toward your target.

Multifamily has been hot for years, but 2021 smashed a quarterly record: According to Freddie Mac’s research, multifamily property sales hit almost $79 billion in Q3 2021. That represents a lot of loans, and for many, a lot of investment journeys just beginning.  

But not all CRE investors and brokers can get the direct path they’re looking for. And that’s because not everyone qualifies on paper for Fannie or Freddie. Some of the reasons might sound familiar: “Just renovated and waiting for the rent roll to build up” or “Currently working out the rent subsidy situation in the area.” The subtext of special cases like these is: “There’s just one thing holding us back from qualifying for an agency loan. What now?” 

In these cases, what you need is an alternative financing solution and a lender to get you there. A bridge-to-agency loan might be that alternative. Or compromising on your agency dream and going with a conventional loan might be it.  

What’s your move? Let’s talk about the pros and cons. 

Agency vs. conventional bank multifamily loan 

Let’s talk about why you might be interested in an agency loan as your final financing destination. Fannie Mae and Freddie Mac offer a large, lush pasture to end up in once you’ve sorted out the upstart of your multifamily investment journey.  

Agency loans offer investors: 

  • 80% loan-to-value (LTV) 
  • Low fixed-interest rates up to 10 years with the hybrid ARM option up to 20 years 
  • Loans are generally non-recourse (They’re not coming after your personal assets should you default on your loan) 

Conventional bank loans, by comparison, typically offer investors:  

  • Full recourse loans 
  • Terms of 15-30 years 
  • Underwriting standards can be more lenient than agency  

There is another option between the above two, as we mentioned earlier: the bridge-to-agency option.  

What is a bridge-to-agency loan? 

Bridge financing for multifamily can be an interim solution that delivers you to the ultimate goal of an agency loan. It is offered by a lender that will close quickly and set you on track to an agency loan after a set amount of time (typically a couple of years with some lenders offering extensions).  

During that time, you can sort out the issues precluding you from the agency loan out of the gate.  

What’s in it for the lender? The lender stakes their reputation on relationships, and a bridge loan is like a big, beautiful trial period during which you get to tackle your near-term objectives and evaluate what it’s like to do business together. Lenders will also collect an exit fee should you decide to take the loan elsewhere when the bridge term is up.  

Who can issue a small balance bridge loan for multifamily? 

Freddie Mac maintains a short list (alphabetical order) of approved small balance loan lenders of which Ready Capital is one. A small balance loan (SBL) is defined as being between $1 million to $7.5 million for a property with a minimum of five apartment units.  

Advantages of working with an SBL multifamily lender 

As a broker or commercial real estate investor in multifamily properties, you have a range of financing options to consider. Many choose to work with a lender who has a specialized license to underwrite loans on behalf of a government Agency such as the Federal Home Loan Mortgage Corporation (Freddie Mac, above) or the Federal National Mortgage Association (Fannie Mae). Certain commercial real estate lenders maintain licenses to originate deals that comply with the guidelines specified by the Agency for which they operate as a “Seller/Servicer.” 

What this means is a smoother process for you from underwriting to refinancing.  

What if your deal doesn’t fit agency requirements?  

Not every small multifamily deal can be financed through the Freddie Mac SBL program. The strict guidelines of the SBL program include minimum requirements for:  

  • Loan amount 
  • Number of units 
  • Occupancy 
  • Property type 
  • (Others) 

Beyond the above reqs, certain types of commercial real estate investors are excluded from the program and even among the eligible investor types, many will not meet the minimums for net worth, liquidity and reserves.   

Given the strict requirements of the program, an SBL Agency loan is not suitable for every small balance multifamily deal, so investors often have to seek alternative financing solutions. 

Is the bridge-to-small balance agency approach your move?  

Since the guidelines for a Freddie SBL deal can be prohibitive for some deals, a bridge loan may fill the gap. At Ready Capital, we specialize in bridge-to-small balance agency lending for deals that don’t quite meet the requirements for a Freddie Mac SBL deal.  

To see what we’ve been up to with multifamily clients like you, scan through our most recent transactions.


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