New to small apartment lending？5 common questions about agency financing answered

Are you looking to enter the world of multifamily investing? Getting a small balance loan to finance an apartment doesn’t need to be daunting. While each property requires a special touch depending on size, location, management, and more, certain elements remain the same. Below are the five most common questions we hear from those interested in learning more about the lending process.

1. What is the difference between recourse and non-recourse lending?

One of the greatest differentiating factors between agency and bank financing is the liability requirement known as recourse or non-recourse obligations.  

A recourse loan includes a personal guarantee from the key borrower; this borrower is also known as a guarantor.  Should the borrower default during the loan term, recourse lenders can seek repayment for any losses and fees incurred by the lender, including shortage of debt repayment. For example, if the collateral securing the loan needs to be sold in foreclosure, and the sale of the property does not cover all debt obligations, the lender may go after the guarantor’s personal assets, such as a different property or car, to satisfy the debt obligations. These types of loans are generally not ideal for most real estate investors that have accumulated significant assets and wealth.

A non-recourse loan is a loan where the borrower or guarantor is not personally liable for repaying the outstanding debt in the event of default or foreclosure.  For example, if the borrower defaults on the loan for a specific property, the lender can only seize that property, even if it does not cover the full value of the defaulted amount. Non-recourse loans do include standard carve-out guarantees, also known as “bad boy” or springing recourse guarantees.  In the event of default, if the borrower commits any of the specified bad acts outlined in the loan documents, including fraud, material misrepresentation, or preventing the lender from enforcing on its collateral, such as filing for bankruptcy or unpermitted transfers, then the guarantor is responsible for any losses that the bank incurs during the foreclosure process.  

2. What should I expect regarding prepayment?

Small Balance Loans offer a great deal of flexibility with a variety of prepayment options from Yield Maintenance to a Step-Down, or declining prepayment penalties.  What do all of these options terms mean?  Let’s break it down.

Yield maintenance prepayment penalty

Yield maintenance prepayment penalty is determined by calculating the present value of the remaining loan payments, with a discount factor equal to the current yield on the U.S. Treasury that matures closest to the loan’s maturity date.  The penalty must be paid in addition to the outstanding loan amount and any accrued interest at the time of prepayment.  In a declining interest rate environment, yield maintenance penalties can be a more expensive alternative for a borrower as opposed to a step-down, or declining prepayment penalty. 

Stepdown or declining prepayment penalty

A stepdown or declining prepayment penalty is based on a predetermined declining percentage of the loan and the amount of time passed since the loan has closed. For example, if the selected prepayment schedule is “3-2-1-1-1” and the borrower wants to pay off the loan in the third year of the loan term, then the prepayment penalty would be equal to 1% of the outstanding loan amount. The penalty must be paid in addition to the outstanding loan amount and any accrued interest at the time of prepayment.  A stepdown prepayment schedule will add a slight increase to the interest rate vs. yield maintenance; however, the predetermined schedule provides maximum flexibility to borrowers, allowing them to sell or refinance regardless of the interest rate environment.

3. What third-party reporting will be required?

We’ll keep it simple with a list. Typical third-party reports include:

• MAI Appraisal
• Streamlined Property Condition Assessment (PCA), or commonly referred to as a Property Needs Assessment (PNA)
• Environmental Site Assessment (ESA)
• Streamlined Zoning Report
• Properties located in seismic zones may require a Probable Maximum Loss (PML) study

4. What expenses should I expect?

Typically, there is a minimum origination fee equal to 1.00% of the loan amount plus approximately $15,000-$17,000 in lender closing costs which include a number of the third-party reports listed above and lender legal. Title and recording costs, survey, and borrower legal are paid by the borrower directly and are excluded from the estimate above.

5. What is the general timeline from getting a quote to closing my loan?

Here is what you can expect:

Part 1: Upon receipt of initial property and borrower due diligence, you will receive a soft quote within 24-48 hours from a multifamily specialist with local expertise (or use the quote app)

Part 2: Application is issued 3 to 7 days from receipt of the initial quote request

Part 3: Loan closing occurs 55-60 days from signed application unless the request is rushed due to a tight timeline for acquisitions and loan maturities

Walker & Dunlop has been operating in the multifamily finance space for over 80 years. Our team of experts has unparalleled knowledge of small balance lending, so if there are additional questions, you would like answered do not hesitate to reach out to an expert in your region or request a quote now.