A question we get often at CREFCOA is related to Fannie Mae and Freddie Mac sponsorship eligibility requirements. Under the Fannie Mae and Freddie Mac multifamily lending platforms the agencies require sponsors to meet specific eligibility requirements. The four main eligibility requirements are:
1. 5+ unit multifamily experience
2. Net worth
It should be noted that eligibility requirements differ based on the lending platform. For example, eligibility requirements differ between the Small Loan program and Conventional Loan program. Eligibility requirements also differ based on the property type, e.g. multifamily, affordable housing, student housing, seniors housing.
What is a sponsor? A sponsor is a person or persons that signs on behalf of the borrowing entity (e.g. LLC, general partnership, C corporation, S corporation, trust).
Why is it important for the sponsor to meet specific eligibility requirements? Most commonly, an LLC (the borrowing entity) is set up to take title (own) to the property. The LLC will have managers and members. The managers conduct the day-to-day operations of the borrower. Since the managers and/or members control activities of the borrower, Fannie Mae and Freddie Mac require whoever controls operations of the borrower (the sponsors) to be underwritten, sign on behalf of the borrowing entity, and guarantee the exceptions to non-recourse.
Who is considered a sponsor? A sponsor is any manager of the entity, regardless of ownership percentage, and any member with a greater than 25% interest in the borrowing entity.
Therefore, the sponsor(s) must be credit worthy and demonstrate the ability to manage the operations of the borrowing entity and property.
Under the Multifamily Small Loan programs of Fannie Mae and Freddie Mac, sponsorship eligibility between the two is very similar.
Fannie Mae and Freddie Mac 5+ Unit Multifamily Experience Requirements
Both Fannie and Freddie require 5+ unit multifamily ownership experience for non-local sponsors. Sponsors are considered non-local if they reside greater than 100 miles from the subject property. Experience requirements vary slightly between the two, but in general 1-2 years of comparable 5+ unit experience is required.
Comparable ownership experience is similar size 5+ unit multifamily properties. 1-4 unit residential properties aren’t considered comparable, nor is other commercial real estate experience, e.g. hotel, self storage, office, retail.
For local sponsors experience isn’t required, but it’s preferred. Local sponsors without experience will typically be required to have professional third party management.
Fannie Mae and Freddie Mac 5+ Unit Multifamily Net Worth and Liquidity Requirements
Fannie Mae and Freddie Mac Small Loan net worth and liquidity requirements are the same. A sponsor’s net worth must be greater than the loan amount and the sponsor must have a minimum of 9 months debt service in pre-closing liquidity. It’s important to note that retirement accounts are included in the net worth calculation but not in the liquidity calculation. Further, for cash out refinances the cash out is not considered in the liquidity calculation.
For a loan with multiple sponsors the cumulative net worth and liquidity of all sponsors is calculated to determine net worth and liquidity.
Fannie Mae and Freddie Mac Multifamily Small Loan Credit Requirements
Sponsors must have a mid-score of 680. Derogatory credit will require a letter of explanation and all judgments, charge offs, foreclosures must be settled with no balances due.
Fannie Mae and Freddie Mac also look at other material derogatory credit history within the past 15 years:
- Bankruptcy, foreclosure/short sale, pending or past material litigation.
- Any sponsor involved in any of the following events at any time (a) money laundering (criminal or civil litigation or regulatory enforcement action), (b) fraud (conviction, regulatory enforcement action, or settlement agreement), (c) any other "Financial Crime", violent crime or felony criminal action other than fraud or money laundering, (d) any civil action between Borrower Principals, (e) Insolvency, bankruptcy or similar proceeding at the time of underwriting or (f) a Borrower Principal is or was an adverse party to Freddie Mac or Fannie Mae in any current or past litigation.
Foreign nationals are eligible under the following circumstances:
- Have assets (bank/security accounts, real estate) held in the United States.
- Have multifamily experience in the United States.
- Foreign nationals are subject to higher net worth and liquidity requirements.
- Have credit history in the United States.
This article provides a high-level overview of sponsorship eligibility requirements for the Fannie Mae and Freddie Mac Small Loan Multifamily programs as of the date of this article. It should be noted that credit requirements change periodically and, in some cases, exceptions can be made if a sponsor fails to meet one or more of the basic eligibility requirements of the respective programs.