For investors looking at multifamily properties, it’s helpful to understand the basic differences between the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac), and non-programmatic lenders like commercial banks.
Fannie Mae and Freddie Mac are government sponsored entities (GSEs) and offer non-recourse loans. This means that if the borrower defaults, the lenderThe person or party (such as a bank or corporate entity) that loans money on a commercial real estat... can foreclose and repossess the property but cannot hold the borrower personally liable—unless the borrower violates the loan’s carve-out provisions (for instance, commits fraud or theft).
By contrast, most commercial bank mortgage loans are full recourse, allowing the lender to attach assets beyond the property if the borrower defaults on the loan.
Other differences between these funding sources include:
Fannie Mae
- Fannie Mae’s primary mission in the multifamily market is to provide financing for workforce housing that is affordable to families with incomes below the area median.
- They do not make loans directly, but buy them from a network of mortgage lenders.
- Fannie actively purchases affordable and market rate loans of less than $3 million.
Freddie Mac
- Freddie Mac was created to expand the secondary mortgage market and reduce interest rate risks for banks.
- The group typically buys mortgages from smaller banks and correspondent lenders.
- More than 70% of units financed by Freddie are affordable to families earning 80% or less of the area median income.
Conventional Bank Loans
- Conventional loans aren’t insured or guaranteed by a government agency or enterprise.
- These loans usually require higher credit scores, lower debt-to-income (DTI) ratios, and larger down payments.
- Although most bank loans are full recourse, banks can offer more flexible terms, more competitive rates, and lower payments in some cases.
While this is just a small sample of information about these funding sources, knowing these differences can familiarize you with each entity as you continue to learn more about commercial real estate.
