Fannie Mae Small Loans: Requirements and Documentation

Fannie Mae and Freddie Mac are the two government-sponsored enterprises (GSEs) that dominate multifamily lending. Their small loan programs compete directly for the same borrowers. Understanding both gives you leverage in negotiations and ensures you get the best terms available.

Fannie Mae vs. Freddie Mac Small Loans

The programs are similar by design—they compete for the same market. Differences often come down to specific lender execution rather than program-level distinctions.

Eligibility Requirements

Property Requirements

• Unit count: 5-50 units (some lenders start at 5, others at 10)
• Property type: Multifamily residential (apartments, townhomes)
• Occupancy: Minimum 90% physical occupancy at closing
• Condition: No deferred maintenance issues; property must be stabilized
• Location: Most U.S. markets (some rural areas excluded)

Borrower Requirements

• Net worth: Equal to or greater than loan amount
• Liquidity: Minimum 9 months of debt service in post-closing reserves
• Experience: Prior multifamily ownership preferred but not always required
• Credit: Generally 680+ FICO, higher scores get better pricing
• Citizenship: U.S. citizens, permanent residents, or eligible foreign nationals

Property Types NOT Eligible

• Student housing (unless conventional leases)
• Seniors housing with services
• Properties with active renovation
• Mobile home parks
• Properties with significant commercial space (>25% of income)

Documentation Requirements

Fannie Mae Small Loans require comprehensive documentation similar to Freddie Mac. Key documents include:

Property Documents

• T-12 Operating Statement — Trailing 12 months, reconciled to bank statements
• Rent Roll — Current, showing unit mix, rents, lease terms, and Section 8 status
• Bank Statements — 12 months for all property accounts
• Leases — All current lease agreements
• Tax Returns — 2-3 years of property Schedule E
• Insurance — Current policy declarations
• Property Tax Bills — Most recent

Borrower Documents

• Personal Financial Statement — Assets, liabilities, net worth
• Tax Returns — 2-3 years personal returns
• Schedule of Real Estate — All owned properties with debt and income
• Entity Documents — Operating agreement, articles of organization
• Background Check Authorization — Standard form

The Underwriting Process

Step 1: Application & Sizing

Lender reviews your T-12 and rent roll to determine preliminary loan amount based on NOI, DSCR, and LTV constraints.

Step 2: Third-Party Reports

Lender orders:

• Appraisal (determines LTV constraint)
• Property Condition Assessment (identifies deferred maintenance)
• Environmental Report (Phase I, sometimes Phase II)
• Survey (if not recent)

Step 3: Underwriting

Lender analyzes:

• Income verification (variance analysis)
• Expense reasonableness
• Market rent comparison
• Borrower financial strength
• Property condition and reserves

Step 4: Commitment

If approved, lender issues commitment letter with final terms. Rate lock typically available at this stage.

Step 5: Closing

Final document collection, title work, and funding. Typical timeline: 45-60 days from application to close.

Pricing Considerations

Fannie Mae Small Loan pricing is based on:

• Index: Treasury rate for the chosen term
• Spread: Lender margin (varies by lender, borrower, property)
• Tier: Loan amount tiers affect pricing (larger loans = better rates)
• LTV: Lower LTV = better pricing
• DSCR: Higher DSCR = better pricing
• Market: Primary markets price better than tertiary

The Execution Trap: Rate vs. Cost

Borrowers often choose Fannie Mae because the rate quote is 10-15 basis points lower than Freddie. They often regret it at the closing table.

Fannie Mae uses a "Delegated Underwriting and Servicing" (DUS) model. This means the lender takes on some loss risk—and in exchange, their legal teams are extremely aggressive.

When to Choose Fannie Mae vs. Freddie Mac

Consider Fannie Mae When:

• Loan amount is $750K-$1M (below Freddie Mac minimum)
• Your lender has better Fannie Mae execution
• You want a 12-year fixed term (not always available with Freddie)
• Specific property characteristics fit Fannie guidelines better

Consider Freddie Mac When:

• Loan amount exceeds $6M (up to $7.5M with Freddie)
• Your lender has better Freddie Mac execution
• Property has characteristics that Freddie handles better

Always Do:

• Get quotes from both programs
• Compare total cost (rate + fees + prepayment)
• Evaluate lender execution quality, not just program

Common Fannie Mae Small Loan Issues

T-12 Variance

Fannie Mae underwriters verify income through bank statement reconciliation. Variance above 3% requires explanation and may result in NOI haircuts.

Below-Market Rents

If your rents are significantly below market, the appraisal may value the property based on market potential—but your loan is sized on actual income. This creates an LTV gap.

Deferred Maintenance

The Property Condition Assessment identifies needed repairs. Required repairs may need to be escrowed or completed before closing.

Occupancy Below 90%

Properties below 90% occupied at application may not qualify. Lease-up period may be required before closing.

The Bottom Line

Fannie Mae Small Loans offer competitive financing for $750K-$6M multifamily properties. The program competes directly with Freddie Mac SBL, and smart borrowers get quotes from both.

The documentation requirements are substantial—T-12, bank reconciliation, rent roll verification—but the payoff is institutional-quality financing at rates unavailable from most local banks.