Do you need a pre-approval letter for multifamily 5+

24 Replies

Hello BP Community!

I am receiving conflicting opinions if I need a pre-approval letter from a Freddie Mac lender for a multi-family 5+ units. I will be financing the property using the Freddie Mac Small Balance Loan program.  Some of the commercial brokers are asking for a pre-approval letter, some commercial lenders tell me a pre-approval letter is only needed for residential loans, can someone please clarify the process. 

Greatly appreciate the help!

Carol

If the commercial broker is asking for it then get it. They are the gatekeepers so you won't get the property without their assistance. Go to your lender and get a term sheet. The broker wants to know you're doing more than just kicking tires. Show them that you're serious.

@Michael Le   I thought I was working with a CBRE lender who works with the Freddie Mac multifamily program but I've been waiting 4 weeks, no pre-approval letter after supplying all the information he requested. I can't believe it takes this long with poor to no follow up, I better start looking for another lender. 

Hi Carol,

Though Freddie SBL can sometimes produce very favorable terms, one of their downfalls is that they sometimes move at a snail's pace.  I doubt it's the broker's fault, since their paycheck relies on closing they're probably pushing as hard as they can.

In commercial, I can't say I've ever seen a broker request a pre-approval letter from the buyer.  Commercial is largely focused on the property financials, vs. residential which is focused on the buyer's financials. It wouldn't make sense to require a pre-approval in the commercial realm when the financials change for each property.

You should revisit your other lender options (hopefully your mortgage broker supplied more than just one!), and weigh the time-value of closing vs. the rates that Freddie SBL gave you.  Sometimes half a percent isn't worth the extra 90 days of lost income due to long closing times.

(Full disclosure: I'm a commercial mortgage broker)

@Andrew Beauchemin thanks for your reply. In part it's managing my expectation of a reasonable timeline. I like the Freddie Mac program because it offers non-recourse loans which is what I need for a self-directed IRA LLC with only 20-25% down instead of 40% with traditional non-recourse loans lenders.

@Andrew Beauchemin is correct. Any Freddie or Fannie multifamily program, including the Freddie SBL, will NOT issue blanket pre-approval letters to borrowers, like one would see in residential. The programs are more focused on the real estate rather than the financials of the sponsor, therefore you'd receive a term sheet from the lender. The term sheets are thoroughly vetted by the lender and if there are any concerns, reviewed by Freddie, so receiving a term sheet would be the commercial equivalent to a pre-approval.  

Andrew, just an FYI: Freddie tells lenders to put their pencils down if they receive the same deal from multiple lenders (IE submitted by NorthMarq and Greystone and CBRE). The lender that comes back with a signed exclusive is allowed to proceed, so it negatively effects the deal to shop multiple Freddie lenders in this case. The Freddie SBL is essentially the same at every shop with a license. The difference would be the timeliness and efficiency in closing, and servicing the loan after it closes.

@Conor Freeman thank you for clarifying that a term sheet is needed for a commercial loan not a pre-approval letter as in residential. Would I be correct to say next steps are:

1. find a 5+ unit property

2. work with a Freddie lender for a term sheet on property found

3. Develop good communication with a Freddie lender who can quickly produce a term sheet in 1-2 days to make an offer on the property. 

@Carol Bloom Yes, yes, and yes. The rule of thumb when qualifying for a Freddie or Fannie loan is having a 1:1 net worth to loan request and 10% of the loan balance in post close liquidity. As long as you have that, some experience in real estate, and no BKs or foreclosures, you'll likely qualify as a borrower. The rest is determined by the property, which needs to have above 90% occupancy and cover to at least a 1.25x DSCR.

@Conor Freeman with what you outlined of having a 1:1 net worth to loan request and 10% of loan balance in post close liquidity and no BK or foreclosures, I would qualify as a borrower. I guess the tough part as I'm experiencing is to find the deal. 

I greatly appreciate you taking the time to explain and help me to better understand the requirements needed to qualify for a Freddie SBL and it's a term sheet and not a pre-approval letter I need. Got it! :)

@Carol Bloom - I have 25+ commercial financed properties, a few times the seller's agent asked for a pre-approval and my bank said they don't do them.  So I never gotten one on a commercial deal but my lender told me to give the agent their contact info and if the agent wanted to call the lender to verify that I qualified they could.  Never had a problem beyond that.

If it is a good deal that I really want I send them screenshots of my bank statements, credit scores, and list of properties I own all with my offer.  

Brie Schmidt, Real Estate Agent in Wisconsin (#57846-90) and Illinois (#471.018287)
Originally posted by @Carol Bloom :

Hello BP Community!

I am receiving conflicting opinions if I need a pre-approval letter from a Freddie Mac lender for a multi-family 5+ units. I will be financing the property using the Freddie Mac Small Balance Loan program.  Some of the commercial brokers are asking for a pre-approval letter, some commercial lenders tell me a pre-approval letter is only needed for residential loans, can someone please clarify the process. 

Greatly appreciate the help!

Carol

 Are you seeking a non-recourse loan for your 5+ unit multifamily?

@Brie Schmidt wow you go girlfriend with 25+ commercial properties!

@Jay Helms yes I am seeking a non-recourse loan on 5+ units. I'm considering Freddie Mac SBL.

Originally posted by @Carol Bloom :

@Jay Helms yes I am seeking a non-recourse loan on 5+ units. I'm considering Freddie Mac SBL.

 In that case, the loan will be based on the property you want to purchase and pre-approval letter isn't valid. In my experience in buying single family homes, it is customary for the list broker/agent to entertain an offer only if a pre-approval letter accompanies the offer. In a commercial property, you're acquiring that assets' revenue and it doesn't have a bearing on your pre-approval. Are you working with a broker that has little to no experience in the commercial space or am I showing my inexperience? :)

@Jay Helms one would think I'm working with an inexperienced lender who is advising me to get a pre-approval letter however it's a CBRE lender. 

@Carol Bloom When I have a property I want to make an offer on I reach out to my lender to get a term sheet for that specific property. To provide me with a term sheet my lender will require the financials from the property such as the rent roll and the P&L statement for the previous 12 months. And then I reach out to my property management company to get a proforma operating budget. Along with that I send my REO schedule showing all the properties I currently own and I send a proof of funds. The closest thing within that bunch to a lender pre-approval letter is the term sheet. But the purpose of all of them is to show that I have done my homework, I have my team ready to go, and I am ready to go.

@Michael Le thank you for clearly outlining the necessary documentation needed to send to the lender, makes complete sense. 

@Carol Bloom I work with a Commercial Bank, they provide a letter of intent (LOI). In the LOI they stipulate that the funding is subject to underwriting. Once a property has been identified and underwritten they will provide a term sheet and then funding.

@Ravi P. how long does the letter of intent (LOI) usually take your commercial bank to put something together for you?

Originally posted by @Carol Bloom :

@Ravi P. how long does the letter of intent (LOI) usually take your commercial bank to put something together for you?

 @Carol bloom

They typically take a day or two.  The bank is a small bank and I have a running relationship with them. 

Ravi

Hi @Carol Bloom ,

That is too bad to hear you are having a difficult time with a CBRE lender. As other have stated a quote should only take 1-2 days from when the information is received. If you still have interest, shoot me a PM and I will put you in contact with the person who specializes in Freddie Mac SBL for CBRE in Scottsdale. He is very responsive and knows the area well.

One quick note on the SBL program - the minimum loan amount is $1M. Sometimes we are able to go between $750k and $1M but is on a case by base basis and requires an exception.

Hope this helps!

Michael

@Jeff Greenberg in talking with other commercial real estate brokers a letter of intent seems to be more of what they are asking for instead of a pre-approval letter. To your point, the brokers don't want to waste their time with tire kickers.   

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