Freddie Mac’s Optigo Small Balance Loan (SBL) program offers many advantages for multifamily owners and buyers around the country seeking favorable terms, flexibility, and a streamlined loan process.

With interest rates expected to remain relatively elevated for the foreseeable future, borrowers may consider the opportunity to lock in stable financing now while they know what to expect, as opposed to waiting for future rate movements which very well could be upward. Freddie SBL loans can be an attractive option for loans in the range from $1 million to $7.5 million for the acquisition and refinancing of multifamily properties with at least five rental units.

Freddie SBL financing is designed to weather nearly all economic conditions, as the agency showed during the pandemic when unemployment reached historic highs. Freddie funded 1,552 SBL loans totaling more than $4.3 billion in 2022, for example. Overall, since launching its SBL program in late 2014, Freddie has financed nearly $40 billion in SBL transactions on approximately 550,000 apartment units.

While the level of affordability in multifamily properties ranges based on local metrics such as area median income (AMI), the majority of these loans have helped finance homes for low- and very-low-income renters. Interest rate discounts are available to borrowers based on Freddie’s affordability calculator.

It is also important to note that many of these properties are not eligible for tax credits and other soft government funding to help keep them affordable, which makes Freddie’s SBL program a vital resource for borrowers.

Here is a closer look at the benefits of Freddie SBL financing for multifamily owners and buyers in 2024.

Exploring the Upsides of Freddie SBL

The upsides of Freddie Mac SBL financing are plentiful, offering certainty in a climate where market conditions continue to take unexpected turns.

Freddie offers non-recourse, fixed-rate and hybrid adjustable-rate mortgages (ARM) with standard carve-outs for multifamily acquisitions and refinancing nationwide. The advantages of SBLs include competitive rates compared to other lending options as well as prepayment options such as yield maintenance and declining schedules. Borrowers who opt for fixed-rate financing through Freddie can leverage loan terms of five, seven, and 10 years.

Amortization on these loans is calculated over a 30-year period, which helps keep the monthly debt obligation low. In certain situations, loans can be structured as full-term interest only (IO). With 30-year amortization and full-term IO, lower debt payments can help free up cashflow for the borrower.

Freddie’s Hybrid ARM option includes a fixed-rate period followed by a floating rate. Effective May 1, 2024, the total term on Freddie’s five-year and seven-year Hybrid ARM has been reduced from 20 years to 10 years. Here are the specifics for eligible borrowers:

  • The five-year hybrid loan includes the initial five-year fixed-rate period followed by a five-year floating rate
  • The seven-year hybrid loan includes the initial seven-year fixed-rate period followed by a three-year floating rate
  • The 10-year hybrid loan remains unchanged with an initial 10-year fixed-rate period followed by a 10-year floating rate

For multifamily owners who may be looking to sell their assets in the future, Freddie SBL mortgages are fully assumable with agency approval and a small fee.

“At Freddie Mac, we often say we serve our mission in good economic times and bad, in markets large and small,” Steve Johnson, SVP of Multifamily Production & Sales at Freddie Mac, noted in June 2023. “During a time marked by record rent increases, our Multifamily Small Balance Loan (SBL) program is an important reminder of that commitment.”

As a Freddie SBL lender, Lument offers services to clients in all markets in all 50 states. Recent transactions, among many others, include a $6.9 million loan for the acquisition of 100-unit multifamily property in Kansas City, Missouri, a $2.8 million loan to refinance an 8-unit multifamily property in Brooklyn, New York, a $4.4 million loan for the acquisition of an 80-unit multifamily property in San Antonio, Texas, and a $2 million loan for the refinance of a 9-unit multifamily property in Chicago, Illinois.

Lument predecessor company Hunt Real Estate Capital was one of the three original lenders that worked with Freddie Mac to help build its Optigo SBL program. That longevity and experience is evident in the expertise of our originators and underwriters and they’re ability to help clients reap the benefits of Freddie Mac financing.

Understanding Housing Market Factors

While Freddie Mac SBL financing is available for multifamily property owners and buyers in all 50 states, individual housing markets have their own unique considerations.

The top SBL markets—which include Chicago, Boston, Washington D.C., and other major cities—allow borrowers, in some cases, to take advantage of maximum loan-to-value (LTV) ratios of 80% and amortizing debt service coverage ratio (DSCR) minimums of 1.20x.

Markets with lower land costs and smaller populations are generally considered riskier. These markets can present challenges when it comes to satisfying Freddie’s occupancy and cashflow requirements. Freddie requires that properties be at least 90% physically occupied for the trailing three-month average prior to underwriting or 85% occupied in the same period if the property is recently built or renovated in a top market and satisfies other criteria. In markets where population growth is limited among other things, Freddie will decrease its LTV below 75 percent and raise its DSCR minimums above 1.35x.

Other markets, such as Miami, that have seen rental housing costs rapidly increase in recent years have their own caveats.

When rents at a multifamily property are naturally affordable, Freddie’s SBL program can provide discounts on interest rate payments. Freddie does affordability testing and has a proprietary calculator that allows borrowers to input their rents based on the AMI goals of their market to see if their assets qualify for interest rate discounts.

Leveraging Optigo Options with Lument

As a seasoned small balance lender, Lument is fully equipped to help multifamily owners and borrowers find the best available terms and pricing considering today’s economic challenges.

Lument’s experienced originators and underwriters work with multifamily borrowers  to fully understand their properties, business plans, and long-term financial needs. Lument can also assist borrowers looking into bridge financing and other transitional debt and equity options as their multifamily properties stabilize to meet Freddie Mac SBL requirements.

Contact Lument today to get the latest market insights and find out more about the available options to leverage Freddie Optigo SBL financing.