SBL Underwriting: The process by which Freddie Mac calculates maximum loan proceeds based on property cash flow (DSCR), value (LTV), and debt capacity (Debt Yield). Your loan is sized to the most restrictive of these three tests.
How Does Freddie Mac Size Your Loan?
You passed eligibility. Now the real math begins.
Freddie Mac SBL underwriting is formulaic—same calculations, applied the same way, every time. The only variable is your data.
What Are the Three Constraints?
Every SBL loan is sized to the most restrictive of three tests. You don't pick which one applies—all three are calculated, and the lowest number wins.
| Test | What It Measures | Typical Constraint |
|---|---|---|
| DSCR | Can the property pay its debt from cash flow? | 1.20x - 1.25x minimum |
| LTV | How much debt relative to property value? | 80% maximum |
| Debt Yield | NOI as a percentage of loan amount | 8% - 10% minimum |
The Binding Constraint: In today's rate environment, DSCR is almost always the binding constraint. Higher rates mean higher debt service, which means you need more NOI to hit the same coverage ratio.
How Does DSCR Work?
Debt Service Coverage Ratio measures whether the property generates enough cash to pay its mortgage with room to spare.
What DSCR Does Freddie Mac Require?
| Loan Type | Minimum DSCR | Notes |
|---|---|---|
| Standard SBL | 1.20x | Top and Standard markets |
| Small/Very Small Markets | 1.25x | Additional cushion required |
| Cash-Out Refinance | 1.25x | Regardless of market |
| First-Time Borrower | 1.25x | No Freddie Mac history in 10 years |
How Does Freddie Mac Calculate NOI?
Freddie Mac doesn't use your NOI. They calculate their own "Underwritten NOI" by adjusting your T-12.
| Line Item | Freddie Mac Treatment |
|---|---|
| Gross Potential Rent | Lesser of: in-place rents OR market rents (no credit for upside) |
| Vacancy | Greater of: actual vacancy OR 5% minimum (economic vacancy floor) |
| Operating Expenses | Greater of: actual expenses OR comparable market data |
| Replacement Reserves | $250/unit minimum (deducted even if you don't escrow) |
| Management Fee | Greater of: actual OR 5% of EGI (even if self-managed) |
The NOI Haircut: Expect Freddie Mac's underwritten NOI to be 5-15% lower than your trailing NOI. They're stress-testing your property against the Chapter 18SBL expense floors—minimum thresholds that apply regardless of your actual numbers.
The Phantom Expense: Self-Management Trap
You manage your own building for free? Cool. Freddie Mac doesn't care. They will insert a 5% Management Fee expense into your NOI calculation—an expense that doesn't exist in your bank account but does exist in your DSCR calculation.
| Your EGI | Phantom Mgmt Fee (5%) | Lost Proceeds (at 1.25x DSCR, 6.5%) |
|---|---|---|
| $150,000 | $7,500 | ~$98,000 |
| $200,000 | $10,000 | ~$130,000 |
| $300,000 | $15,000 | ~$195,000 |
The Math: On a $200,000 EGI property, the 5% phantom fee is $10,000. At 1.25x DSCR and 6.5% rates, that's approximately $130,000 less in loan proceeds—for an expense you never actually pay.
The Valuation Hit: That phantom $10,000 expense doesn't just reduce your loan—it reduces your property's value. At a 6.5% cap rate, $10,000 of imputed expense = $153,000 lower appraised value. The lender's appraiser uses Freddie's NOI, not yours.
How Do I Calculate My DSCR-Constrained Loan?
Sample Calculation
- T-12 NOI: $180,000
- Freddie Adjustments: -$15,000 (vacancy floor, reserves, management)
- Underwritten NOI: $165,000
- Target DSCR: 1.25x
- Max Annual Debt Service: $165,000 ÷ 1.25 = $132,000
- At 6.5% rate, 30yr am: Max loan ~$1,725,000
How Does LTV Work?
Loan-to-Value caps how much you can borrow relative to the appraised value. Even if cash flow supports more debt, you can't exceed the LTV ceiling.
What Are Freddie Mac's LTV Limits?
| Transaction Type | Max LTV | Notes |
|---|---|---|
| Purchase (Top/Standard Markets) | 80% | Standard maximum |
| Rate/Term Refinance | 80% | No cash out |
| Cash-Out Refinance | 75% | 5% haircut for cash extraction |
| Small Markets | 75% | MSAs 100K-500K population |
| Very Small Markets | 70% | MSAs under 100K population |
Appraisal Risk: The appraisal is ordered by the lender, not the borrower. You don't control the value. If the appraisal comes in low, your loan gets cut—there's no negotiation.
The Cap Rate Trap: Appraisers use market cap rates, not your purchase cap rate. If you bought at a 5% cap but the market is at 6%, the appraised value will be lower than your purchase price.
What Is Debt Yield?
Debt Yield is Freddie Mac's check against overleveraging in low cap rate environments. It measures NOI as a percentage of the loan amount—independent of interest rates.
| Scenario | Minimum Debt Yield |
|---|---|
| Standard SBL | 8.0% - 9.0% |
| Higher Risk Transactions | 10.0%+ |
Why 8%? Because if they foreclose, they need to know the property yields at least 8% as a rental asset sitting on their books. Debt Yield is the "worst case return"—what does Freddie Mac earn if they take the keys and operate it themselves?
How Do the Three Constraints Work Together?
Here's how underwriters actually size your loan:
- Calculate DSCR-constrained loan — Based on underwritten NOI and required coverage
- Calculate LTV-constrained loan — Based on appraised value and LTV limit
- Calculate Debt Yield-constrained loan — Based on NOI and minimum yield
- Take the minimum — Your loan is sized to the most restrictive constraint
Real-World Example
20-Unit Property in Dallas
- Underwritten NOI: $165,000
- Appraised Value: $2,400,000
- Rate: 6.50%, 30-year amortization
| Constraint | Calculation | Max Loan |
|---|---|---|
| DSCR (1.25x) | $165,000 ÷ 1.25 = $132,000 max debt service | $1,725,000 |
| LTV (80%) | $2,400,000 × 80% | $1,920,000 |
| Debt Yield (9%) | $165,000 ÷ 9% | $1,833,333 |
Result: DSCR is the binding constraint. Max loan = $1,725,000, even though value would support $1,920,000. That's a $195,000 gap that comes out of your equity.
Where Do Deals Get Cut?
Understanding why loans get sized down helps you prepare better documentation upfront.
| Issue | Impact | Prevention |
|---|---|---|
| Rent roll doesn't match T-12 | Lower of two values used | Reconcile before submission |
| Vacancy dip in trailing 3 months | Higher vacancy assumption | Delay until stabilized |
| Below-market expenses | Expenses grossed up to market | Document why expenses are low |
| One-time income included | Excluded from underwriting | Break out non-recurring items |
| Self-management claimed | 5% management fee imputed | Expect this adjustment |
The Variance Problem: If your T-12 income doesn't reconcile to bank statements within 5%, underwriters use the lower number. A $10,000 unexplained variance can cost you $130,000 in loan proceeds.
How Does Clean Data Increase Proceeds?
Every dollar of NOI you can defend is worth approximately $13-16 in loan proceeds at current rates.
| Documentation Issue | Typical NOI Haircut | Loan Impact (at 1.25x DSCR) |
|---|---|---|
| Unexplained T-12 variance | $5,000 - $15,000 | $65,000 - $195,000 |
| Missing lease for one unit | $6,000 - $18,000 | $78,000 - $234,000 |
| Section 8 income unverified | $10,000 - $30,000 | $130,000 - $390,000 |
| Expenses below market (unsubstantiated) | $3,000 - $10,000 | $39,000 - $130,000 |
The Bhumi Advantage: A clean, reconciled T-12 with documented income and defensible expenses maximizes your underwritten NOI—which directly maximizes your loan proceeds.
What Is the Repurchase Obligation?
Here's what your mortgage broker won't explain: Freddie Mac doesn't hold these loans. They securitize them and sell them to investors. But if something goes wrong, the originating lender has to buy the loan back.
This is Chapter 46SBL—the Repurchase Obligation—and it's why underwriters are so aggressive about your documentation.
What Triggers a Repurchase Demand?
| Trigger | Example | Consequence |
|---|---|---|
| Material Misrepresentation | T-12 income was overstated by 15% | Mandatory repurchase |
| Documentation Deficiency | Missing leases, unverified Section 8 | Repurchase or cure period |
| Eligibility Violation | Property didn't meet 90% occupancy at closing | Mandatory repurchase |
| Early Payment Default | Borrower defaults within 12 months | Triggers documentation review |
The Lender's Nightmare: A repurchase on a $2M loan means the lender must buy back the entire loan balance, often at a loss. One bad deal can wipe out the profit from 20 good deals.
How Does This Affect Your Deal?
| "Prove It or Lose It" | Any income you can't verify with source documents gets excluded |
| "Worst Case Wins" | When two data sources conflict, underwriters use the lower number |
| "Paper Trail or No Deal" | Verbal explanations mean nothing—everything needs documentation |
The Insight: Your lender isn't being difficult—they're protecting themselves from a repurchase demand. Clean, verifiable data reduces their risk, which makes them more willing to fight for your loan in Credit Committee.
What Should I Verify Before Submission?
Pre-Underwriting Checklist
- NOI Reconciliation: Does T-12 NOI reconcile to bank deposits within 5%?
- Rent Roll Match: Does every lease match the rent roll exactly?
- Vacancy Buffer: Is trailing 3-month occupancy above 90%?
- Expense Documentation: Can you explain any expense below market norms?
- Section 8 Verification: Do HAP contracts and payments trace to specific tenants?
- Management Expectation: Are you prepared for 5% management fee imputation?
The Bottom Line: Freddie Mac underwriting is math. The inputs are your NOI, your value, and your documentation quality. You control one of these completely—make it count.