The Federal Home Loan Mortgage Corporation (Freddie Mac) is a government-backed corporation that buys mortgages from certified lenders and packages these mortgages into mortgage-backed securities.
In this article, we’ll explore key features of Freddie Mac loans, pros and cons, use cases, rates, and more!
Let’s dive in.
Freddie Mac exists to improve credit flow via mortgages throughout the United States.
By purchasing mortgage loans from lenders.
These lenders use the funds from the sale of these mortgages to generate new loans to more homebuyers.
This exchange creates a healthy feedback loop that benefits both borrowers and the housing market writ large.
How does Freddie Mac help lenders and borrowers?
Freddie Mac allows banks to provide borrowers with the standard 30-year mortgage.
Without Freddie Mac’s financial backing, banks wouldn’t be able to afford to keep loans on their books for that long of a time period.
Additionally, Freddie Mac resells these new mortgage-backed securities to investors on the secondary market.
These sales allow even more investors to profit from the real estate market. Freddie Mac takes these proceeds to purchase more mortgages, and the cycle repeats.
Freddie Mac makes mortgage lending less risky for banks, expands the pool of buyers, and makes homeownership more affordable for families across the nation.
Freddie Mac: Single Family vs. Multifamily Division
To understand Freddie Mac loans, it’s important to understand the difference between its single-family and multifamily divisions.
Think of multifamily financing like commercial lending.
Multifamily borrowers are commercial entities (property developers, for example), not individual homeowners.
Additionally, Freddie Mac only buys multifamily commercial loans from approximately 30 commercial real estate lenders—many of these lenders do not offer any single-family loans.
For these reasons, Freddie Mac’s multifamily loans are substantially larger than their single-family division—they typically range between $10M and $50M, although they can drop down to $1M and as high as $1B.
Freddie Mac does not automate the underwriting process for its multifamily division; instead, Freddie Mac staff complete the process and price mortgages before purchasing them.
The following table helps visualize some of the main differences between Freddie Mac Multifamily and Single-Family loans.
|Property size||5+ units||1-4 units|
|Freddie Mac lenders||About 30 Optigo® lenders||1,700+|
|Loan size||$1M – $100+M — no current limit||Legislated limit of $548,250 for a 1-unit home, $822,375 for high-cost areas|
|Underwriting process||Manual||Usually automated|
|Number of parties involved||Many, sometimes including government agencies||One borrower|
|Source of mortgage payments||Income from rents||Borrower’s personal income|
|Servicing involvement||Active in monitoring each loan’s performance||Involved if the loan becomes delinquent|
Freddie Mac Multifamily Products
Freddie Mac offers 4 specific multifamily products.
Visit the links below to learn about each of Freddie Mac’s multifamily products.
- Conventional — competitively priced, reliable Optigo® loan products for the acquisition, refinance, or rehabilitation of multifamily communities
- Small Balance Loans — Optigo® loans for small apartment buildings targeting 5 to 50 units, $1M to $7.5M
- Targeted Affordable Housing — Optigo® loans for properties in underserved areas that are affordable to families with low and very-low incomes including cash loans, bond credit enhancements, tax-exempt loans, and others.
- Seniors Housing — Optigo® Senior Housing Loans include independent living properties, assisted living properties, and properties with skilled nursing or memory care.
Pros of Freddie Mac Loans
Freddie Mac loans present many benefits to both lenders and borrowers.
The specific benefits of Freddie Mac loans depend on the actual mortgage product (see above).
For the sake of example, we’ll examine one of Freddie Mac’s most popular multifamily loan offerings: Small Balance Loans (SBL).
Broadly speaking, these multifamily loans are highly flexible. Additionally, they offer borrowers both generous terms and leverage.
Some specific advantages of Freddie Mac’s SBL program include:
- Low-interest rates starting at just 4.51%
- Flexible loan sizes starting at $750,000 and ending at $7.5M
- High leverage of up to 80% LTV
- Generous DSCR minimums, often as low as 1.20x
- 30 amortizations that keep monthly payments low for borrowers
- Options for both partial and full-term interest-only loans
- Cash-out refinancing available for eligible borrowers
- Multiple fixed-rate term options (up to 10-year terms) and hybrid ARM options with 20-year terms
- 60-120 day rate commitments
- Fully assumable loans with 1% fee and Freddie Mac approval
- Non-recourse financing (individual exceptions)
Cons of Freddie Mac Loans
Freddie Mac loans are not without their downsides.
For example, they require borrowers to pay upfront application fees, and they exclude certain property types—including senior housing, student housing, and other affordable commercial property types.
Again, we’ll look specifically at some disadvantages of Freddie Mac’s SBL Program:
- Not typically available for standard multifamily properties, properties with 50% or more concentration of student or military housing, Section 8 properties with below-market rents, LIHTC properties still in compliance period, or other affordable housing types
- Require numerous third-party reports and assessments: Freddie Mac multifamily appraisals, a property condition report, and a Phase I Environmental Assessment
- Requires an application fee ($4500 for Top Markets)
- Strict leverage and DSCR requirements in small and very small markets—1.30x and 1.40x DSCR, respectively, and 70-75% LTV
- Various limits on subordinate financing
- Require replacement reserves up to $300/unit
Freddie Mac Loan Use Cases
Freddie Mac can be a great option for different commercial real estate needs.
- Refinancing, acquiring, or rehabilitating a multifamily community property
- Investing in a small apartment building
- Purchasing properties located in underserved areas
- Purchasing senior living or assisted care properties (skilled nursing, memory care, etc.)
Which Freddie Mac loan should you choose?
That depends on your current financial situation and on the type of property you’re purchasing.
Freddie Mac Loan Requirements
Freddie Mac requires that all borrowers meet certain credit scores, income levels, work history, DTI ratios, and minimum down payment requirements.
The specific requirements will vary depending on your specific loan.
Generally, lenders will consider the following criteria when assessing your application:
- Total monthly expenses
- Total gross income per month
- Employment history
- Credit score and payment history
- Assets (checking, savings, and retirement accounts)
Your lender might also ask for more information after manually reviewing your application. Keep in mind some of the basic requirements for conforming loans:
- Minimum credit score of 620
- DTI ratio of 45% or less
- Down payment of 3% or more
- Down payment funds must come from a documented asset source
- Remember that some Freddie Mac loans have income limits
- Certain cash reserves depending on your credit score and/or DTI ratio
Freddie Mac Loan Rates
Rates on Freddie Mac loans will depend on the purpose and the type of loan you’re pursuing.
Visit Freddie Mac’s website to learn more about the standard rates for both single-family and multifamily loans.
Freddie Mac Loan Alternatives
Freddie Mac loans are a great option either for a single-family home purchase or a multifamily, commercial property.
However, it’s important to assess your own financial needs and situation before committing to a Freddie Mac loan.
Fannie Mae offers similar loans. The main competitive differences between both organizations center around guidelines—mortgage approval, assessing a borrower’s financial profile, credit history, income level, etc.
As a borrower it’s possible (but unlikely) to be approved by one organization, but not the other.
Other alternatives to Freddie Mac loans include:
- VA loans
VA loans are backed by the Department of Veteran affairs.
They’re available to active-duty US military members, military veterans, and surviving spouses.
- FHA loans
Backed by the Federal Housing Administration, FHA loans offer low down payment options (minimum 3.5%) along with low credit score requirements (as low as 500, provided you commit to a 10% down payment).
Learn more about FHA loans here.
- USDA loans
Designed for low-and-moderate income borrowers living in rural areas, USDA loans are offered through the USDA (US Department of Agriculture).
- Jumbo loans
Throughout the majority of the US, the borrowing limit rests at $548,250. High-cost regions have limits of up to $822,375.
Jumbo loans exceed the borrowing limits set by Fannie Mae and Freddie Mac for a conventional loan.
Summary & Final Thoughts
No one-size-fits-all solution exists when it comes to financing your home or commercial real estate property.
That’s why Freddie Mac offers different loan programs that make it possible for borrowers from various situations to purchase their first home or investment property.
It’s important to remember that Freddie Mac does not make loans. Instead, they purchase qualified loans from lenders. This transaction provides funding for banks. The banks, in turn, make more loans and drive down interest rates for borrowers.
Freddie Mac loans come with a certain set of guidelines—these guidelines classify Freddie Mac loans as conventional, conforming loans.
Conventional loans can either be fixed- or adjustable-rate loans, and they can be used to finance almost any type of property, from a first home to an apartment complex.
To qualify for Freddie Mac loans, it’s important that you present
- Good credit score (varies by loan product)
- Stable income
- Low debt-to-income ratio
- Ability to make a minimum down payment