Loan Servicing: The ongoing administration of your Freddie Mac loan after closing—collecting payments, managing escrows, monitoring compliance, and handling requests. Your servicer is your primary contact for the life of the loan.
What Happens After Closing?
Closing day isn't the finish line—it's the starting point. For the next 5, 7, or 10 years, your property operates under Freddie Mac's rules.
Once your loan closes, your relationship shifts from the originating lender to the servicer. May be the same company or a specialized servicing shop.
| Party | Role | Your Contact |
|---|---|---|
| Freddie Mac | Owns or guarantees the loan | No direct contact |
| Servicer | Collects payments, manages escrows, monitors compliance | Primary contact |
| Master Servicer | Oversees servicer, handles escalations | Escalation only |
Know Your Servicer: Within 30 days of closing, you'll receive a welcome package with payment instructions, escrow details, and contact information. Save this—you'll need it for every request.
What's Included in My Monthly Payment?
Your payment includes more than just principal and interest.
| Component | Purpose | Notes |
|---|---|---|
| Principal & Interest | Debt service on the loan | Fixed for the loan term |
| Tax Escrow | Real estate taxes held and paid by servicer | Adjusted annually based on tax bills |
| Insurance Escrow | Property insurance premiums | Adjusted at policy renewal |
| Replacement Reserve | Capital expenditure fund | Minimum $250/unit/year |
The Escrow Adjustment: Every year, your servicer analyzes escrow accounts and adjusts your payment. If taxes or insurance increased, your payment increases. Budget for 3-5% annual escrow increases.
What Happens If I Pay Late?
| Grace Period | Typically 10-15 days after due date |
| Late Fee | Usually 5% of the monthly payment |
| Default Notice | Sent after 30 days delinquent |
| Reporting | Delinquencies reported to Freddie Mac |
Payment History Matters: Late payments are reported to Freddie Mac and become part of your borrower history. A pattern of late payments affects your ability to get future Freddie Mac loans.
What Are the Annual Requirements?
Freddie Mac requires ongoing verification that your property continues to meet their standards.
What Do I Need to Submit Each Year?
Each year, you must provide an updated T-12 operating statement to your servicer. Additionally, your servicer may conduct an Annual Inspection using the AIF (Annual Inspection Form)—the standardized scorecard that grades your property's physical condition and operational compliance each year.
Annual Reporting Requirements
- Operating Statement: Trailing 12 months of income and expenses
- Rent Roll: Current rent roll showing occupancy and rents
- Due Date: Typically 120 days after fiscal year end
- Format: Servicer's standard template
The Reporting Penalty: Failure to submit annual reports on time can trigger default provisions. Most servicers send reminders, but consistent non-compliance creates a paper trail that affects your borrower status.
What Are the Insurance Requirements?
Your insurance must remain compliant throughout the loan term:
| Certificate Renewal | New certificate required at each policy renewal |
| Coverage Amounts | Must maintain original coverage levels (or higher) |
| Named Insured | Servicer must remain named as mortgagee |
| Lapse Protection | If coverage lapses, servicer force-places insurance at your cost |
Force-Placed Insurance: If your insurance lapses, the servicer purchases coverage on your behalf. Force-placed insurance is expensive—often 2-3x market rates. Send renewal certificates 30 days before expiration.
How Do I Access My Replacement Reserves?
The replacement reserve escrow is your capital expenditure fund. Understanding how to access it keeps your property maintained without out-of-pocket costs.
What's the Disbursement Process?
- Submit Request: Complete servicer's reserve disbursement form
- Provide Documentation: Contractor invoices, proof of completion, before/after photos
- Servicer Review: 10-15 business days typical
- Inspection (if required): For larger draws, servicer may inspect work
- Disbursement: Funds released to borrower or directly to contractor
What Can I Use Reserves For?
| Eligible | Not Eligible |
|---|---|
| Roof replacement/repair | Routine maintenance |
| HVAC replacement | Cosmetic improvements |
| Parking lot resurfacing | Operating expenses |
| Water heater replacement | Unit turns/make-ready |
| Exterior painting | Landscaping maintenance |
| ADA compliance improvements | Debt service |
Use Your Reserves: Many borrowers let reserves accumulate unused. That's your money sitting in escrow earning minimal interest. Submit disbursement requests for legitimate capital items.
What Changes Require Servicer Approval?
Any change to ownership, guarantors, or entity structure requires approval.
| Change Type | Approval Required | Typical Fee |
|---|---|---|
| Transfer of ownership interest | Yes | $5,000 - $15,000 |
| Change of Key Borrower Principal | Yes | $5,000 - $15,000 |
| Property management change | Notification required | Usually no fee |
| Entity name change | Notification required | Usually no fee |
| Addition of mezzanine debt | Yes (rarely approved) | Substantial |
The Assumption Trap: Freddie Mac loans are assumable, but assumption requires full underwriting of the new borrower. Expect 60-90 days and $10,000-$25,000 in fees. Don't promise a buyer they can assume unless you've confirmed with the servicer.
How Do Prepayment Penalties Work?
Eventually, you'll want to sell, refinance, or pay off your loan. Understanding prepayment provisions is critical to timing your exit.
What Are the Prepayment Structures?
Most SBL loans use one of three structures:
| Structure | How It Works | Best For |
|---|---|---|
| Yield Maintenance | Pay present value of remaining interest payments | Rising rate environments |
| Declining Balance | Percentage of balance, declining over time (e.g., 5-4-3-2-1) | Predictable penalty planning |
| Defeasance | Replace collateral with Treasury securities | Large loans, complex transactions |
How Is Yield Maintenance Calculated?
Yield maintenance ensures Freddie Mac receives the same yield they expected when they priced your loan. Think of it as a bond trade: you're effectively paying the lender the profit they would have made if you'd held the loan to maturity.
The Bond Math: If Treasuries drop 1% below your note rate, the penalty doesn't just go up—it roughly doubles for each additional 1% drop. This is why yield maintenance is brutal in falling rate environments but nearly zero when rates are rising.
Yield Maintenance Sensitivity: The Pain Scale
On a $2M loan with 5 years remaining, here's what rate drops cost you:
| Rate Drop | Prepayment Penalty | Reality Check |
|---|---|---|
| 0.5% | ~$50,000 | Painful but manageable |
| 1.0% | ~$100,000 | Kills most refinance savings |
| 1.5% | ~$150,000 | Wait for open period |
| 2.0% | ~$200,000 | Locked in—plan around it |
| 2.5% | ~$250,000 | Major transaction cost |
Insider Tip: Before signing, ask your lender for a yield maintenance calculator with your actual numbers. Run scenarios at +1%, flat, and -1% Treasury moves. Most borrowers are surprised by the downside.
The Rate Environment Trap: In a declining rate environment, yield maintenance penalties can be substantial. If your note rate is 6.5% and comparable Treasuries are at 4%, you're paying 2.5% annually for every year remaining. On a $2M loan with 5 years left, that's approximately $250,000.
What Is the Open Period?
Most Freddie Mac loans have an "open period" in the final months when you can prepay without penalty:
| Typical Open Period | Final 90 days of loan term |
| Some Loans | Final 6 months with reduced penalty |
| Notice Required | 30 days written notice to servicer |
Plan Your Exit: If you're selling or refinancing, time the transaction to close during the open period. A 90-day window gives you flexibility to market while avoiding prepayment penalties.
What's the Payoff Process?
When you're ready to exit:
- Request Payoff Quote: Submit written request to servicer (allow 10-15 business days)
- Review Quote: Verify principal balance, accrued interest, escrow credits, any penalties
- Provide Notice: Written payoff notice per loan documents (usually 30 days)
- Wire Funds: Payoff must be received by wire transfer
- Release: Servicer records satisfaction of mortgage (allow 30-60 days)
What's Included in a Payoff Quote?
| Principal Balance | Remaining loan balance |
| Accrued Interest | Interest from last payment through payoff date |
| Prepayment Penalty | Per loan documents (if outside open period) |
| Escrow Credit | Refund of unused escrow balances |
| Release Fee | Recording and administrative costs |
What Should I Track Throughout the Loan Term?
Key dates and actions throughout your loan:
Ongoing Compliance
- Monthly: Verify payment received, check escrow balance
- Quarterly: Review property performance against underwriting
- Annually: Submit operating statement and rent roll
- At Insurance Renewal: Send updated certificate to servicer
- Before Any Transfer: Contact servicer for approval process
- 18 Months Before Maturity: Begin refinance or sale planning
- 90 Days Before Maturity: Open period begins (if applicable)
The Bottom Line: Your Freddie Mac loan is a 5-10 year relationship. Stay compliant, use your reserves, maintain good payment history, and plan your exit around the open period. The borrowers who succeed treat servicing as asset management, not paperwork.