Top 3 Tips for Refinancing Small-Balance Multifamily Loans

With the recent banking turmoil and tightening of credit, many multifamily borrowers with looming maturity dates may be wondering, “Will I be able to refinance?”

The answer is, “It depends on how risky your current loan is.” According to Trepp, $37 billion in “at-risk” multifamily loans are set to mature in 2023 and 2024. These loans have significant refinancing risk due to:

• Low debt service coverage ratios
• Low debt yield
• High loan-to-values

For example, about 32 percent of multifamily loans maturing in the next two years have a DSCR of less than 1.25x.

Finding a lender willing to refinance these low-DSCR loans can be difficult, particularly for small-balance loan amounts ($1 million to $7.5 million). Fannie Mae and Freddie Mac’s small-balance multifamily programs generally require a DSCR greater than 1.25x.

However, the short list of Fannie and Freddie’s approved small-balance multifamily lenders (about a dozen currently) is not your only option. There are many other small-balance lenders to turn to for refinancing. These niche lenders have higher risk appetites and less stringent requirements.

Therefore, the key to successfully refinancing is to find the right lender for your situation. Want to make your search for your new small-balance multifamily lender as efficient as possible? Here are three categories of items to research and questions you should ask any potential lender before hitting the “Apply” button.

1. Make sure the lender will accept your property profile

Small-balance multifamily lenders consider the following main factors when assessing the subject property: DSCR, geographic location, occupancy rate, and commercial space percentage.

Fannie and Freddie small-balance multifamily lenders typically require a minimum DSCR ranging from 1.20x to 1.40x depending on the market, a minimum occupancy rate of 90 percent, and will not allow mixed-use properties if the commercial space percentage is above 35 percent.

Those requirements can be especially stringent. However, other lenders have more relaxed guidelines and allow a minimum DSCR as low as 1.00x, a minimum occupancy rate of 80 percent, and will allow commercial space up to 50 percent.

2. Make sure the lender will accept your borrower profile

Besides the property itself, the lender will also put a magnifying glass on your personal financial profile and scrutinize these main factors: credit score, credit events, citizenship, and reserves.

Under the Fannie and Freddie small-balance multifamily programs, the borrower must typically have a minimum credit score of 680, have no credit events (foreclosure, bankruptcy, deed-in-lieu, short sale) in the past 7 years, be a U.S. citizen, and have at least 9 months of reserves (principal and interest).

By contrast, more creative lenders allow a minimum credit score of 620, have a lookback period for credit events of only three years, and require only three to six months of principal and interest reserves. And, permanent resident aliens and foreign nationals may also apply.

3. Make sure the lender offers the terms you need

You should also determine whether the lender satisfies at least some of the items on your wish list: loan-to-value, loan amount, cash-out, and time to close.

Across the board, small-balance multifamily lenders offer a wide variety of loan terms to choose from, including five-, seven-, or 10-year fixed-rate loans, or 20-year hybrid ARM with initial five-, seven-, or 10-year fixed-rate periods, and amortization up to 30 years.

However, if you are more sensitive to LTV and loan amount, you should be aware of the following differences:

• Fannie and Freddie lenders offer a maximum LTV of 80% but that is reserved for multifamily properties located in top and standard markets.
• By contrast, other lenders offer 80% LTV to properties located not only in top and standard markets but also in smaller markets.
• For the loan amount, Fannie and Freddie lenders typically cap out at $6 million or $7.5 million, respectively.
• If you are looking for a higher loan amount, other lenders can go as high as $10 million (or more).

If you’re looking for a cash-out refinance, other lenders allow up to $1 million cash in hand, whereas Fannie and Freddie offer cash-out on a more case-by-case basis.

Finally, if your maturity date is just around the corner, keep in mind that the average time to close for Fannie and Freddie lenders is about 45-60 days, whereas other lenders can close as soon as 30 days.

Navigating your way to a successful refinance

In the next couple of years, many multifamily borrowers will have difficulty exiting their maturing loans.  Refinancing may be the only exit strategy if exercising an extension option or selling the property are not available paths.

Luckily, even with tighter credit conditions, it is still possible to refinance with a flexible small-balance multifamily lender that has less stringent guidelines than Fannie Mae and Freddie Mac.  You just have to know where to look.

David A. Krebs is principal broker at DAK Mortgage, an originator of commercial mortgage loans nationwide, as well as residential loans in Florida.