A cash on cash return calculation determines the amount of annual income an investor earns on a piece of real estate when compared to the amount of cash invested.
What is FNMA in Commercial Real Estate?
FNMA, or Fannie Mae Mortgage Association, is a U.S. government sponsored enterprise that focuses on expanding housing opportunities across the United States. To do so, it purchases residential mortgages from lenders and securitizes, or pools them, into mortgage-backed securities. While Fannie Mae does not offer direct commercial real estate loans, investors can rent a certain amount of commercial space if they use an FNMA loan to purchase a multifamily property.
For example, apartments purchased with a Fannie Mae DUS loan are permitted to have up to 35% of their property's space occupied by commercial tenants. Or, they can derive 20% of the property's income from commercial sources (whichever is less).
Popular Fannie Mae Multifamily Loans
Some of the most popular kinds of Fannie Mae multifamily loans include:
Fannie Mae DUS Loans: The most popular multifamily loan program offered by Fannie Mae, the DUS program allows for loans of $3 million or above.
Fannie Mae Multifamily Small Loans: These multifamily loans are sized between $750,000 and $5 million, and offer streamlined underwriting and documentation requirements.
Fannie Mae Affordable Housing Loans: With a minimum loan size of $1 million, this program is designed especially for properties using the Section 8 Housing Assistance Program (HAP), projects with expiring LIHTC tax credits, or projects using other, specific, affordable housing arrangements.
Fannie Mae Senior Housing Loans: With a minimum loan size of $5 million, these loans are available to independent living, assisted living, and Alzheimer’s/Dementia care projects for senior citizens.
Fannie Mae Multifamily Loan Terms
While terms vary significantly with different loan products, most Fannie Mae Multifamily loans have the following terms:
Leverage: Maximum 80% LTV
DSCR: 1.15-1.30 minimum DSCR
Recourse: Non-recourse, standard carve-outs apply
Loan Term: 5-30 years
Freddie Mac Also Insures Multifamily Loans
In addition to Fannie Mae, its brother corporation, Freddie Mac, also purchases and insures multifamily mortgages, including some that allow for a degree of commercial property use. For example, properties purchased with a Freddie Mac Small Balance Loan (SBL), can derive up to 40% of their income from commercial rents.
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An FHLB (sometimes referred to as an FHLBank) or Federal Home Loan Bank is a region based bank that is part of a federally backed group of banks who provide housing finance and community investment loans. There are 11 FHLBs in total that provide reliable liquidity to financial institutions that are members of the program in order to support community investment and housing finance in the country.
HUD is the term used to describe The United States Housing and Urban DevelopmentDepartment, which is the federal department tasked with creating decent housing for citizens. The government agency was founded in 1965 to support community development and home ownership.
AMI stands for Area Median Income and is a statistic published by HUD. It is the household income of the median (middle) household in an area. HUD releases the AMI for areas across the USA every year. AMI is used as a measure to determine who qualifies for its federal housing programs.