Chapter 9

Small Mortgage Loans

Section 901

Generally
Section 902

Key Principal Guaranty Obligation

Requirements

You must obtain a Non-Recourse GuarantyNon-Recourse GuarantyGuaranty executed by a Key Principal on Form 4501 series or Form 6015 series, or approved by Fannie Mae.  (Form 6015) from each Key PrincipalKey PrincipalPerson who controls and/or manages the Borrower or the Property, is critical to the successful operation and management of the Borrower and the Property, and/or may be required to provide a Guaranty. .

Section 903

Occupancy

Requirements

Small Mortgage LoansSmall Mortgage LoansMortgage Loan with an original loan amount less than or equal to $9 million. must achieve Stabilized Residential OccupancyStabilized Residential OccupancyPercentage of Property units physically occupied by Qualified Occupants, per Part II, Chapter 1: Attributes and Characteristics, Section 105.02: Qualified Occupants as adjusted for the applicable Part III products and features. as follows:

If the Property contains...

Then it must have...

10 or more units

at least 90% physical occupancy by Qualified OccupantsQualified OccupantsParty occupying a dwelling unit in a Property in full compliance with a lease. for the 90 days immediately before the Commitment DateCommitment DateDate a Commitment is confirmed by Fannie Mae per Part IV, Chapter 2: Rate Lock and Committing, Section 204: Commitments. .

Less than 10 units
  • no more than 1 vacant unit as of the Commitment DateCommitment DateDate a Commitment is confirmed by Fannie Mae per Part IV, Chapter 2: Rate Lock and Committing, Section 204: Commitments. , and
  • an average occupancy by Qualified OccupantsQualified OccupantsParty occupying a dwelling unit in a Property in full compliance with a lease. of at least 90% for the 12-month period immediately before the Commitment DateCommitment DateDate a Commitment is confirmed by Fannie Mae per Part IV, Chapter 2: Rate Lock and Committing, Section 204: Commitments. .

If a Small Mortgage LoanSmall Mortgage LoanMortgage Loan with an original loan amount less than or equal to $9 million. is secured by an MH CommunityMH CommunityResidential real estate development with lots on which manufactured homes are located, together with amenities, utility services, landscaping, roads, and other infrastructure. , then Stabilized Residential OccupancyStabilized Residential OccupancyPercentage of Property units physically occupied by Qualified Occupants, per Part II, Chapter 1: Attributes and Characteristics, Section 105.02: Qualified Occupants as adjusted for the applicable Part III products and features. must comply with Part II, Chapter 1: Attributes and Characteristics, Section 105: Minimum Occupancy.

Section 904

Corporate Leases; Leases to One Entity

Guidance

Entity leases are permitted; but you should analyze the effect of leasing

  • more than 10% of the total residential units in the PropertyPropertyMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). to corporations, partnerships, trusts, and other entities, or
  • more than 5% of the total residential units to any single corporation, partnership, trust, or other entity.

Entity leases of residential units for residential purposes are considered residential space.

Section 905

Property Income Analysis
Section 906

Property Management

Requirements

To ascertain the property management requirements, you must determine how many years of experience, as of the Commitment DateCommitment DateDate a Commitment is confirmed by Fannie Mae per Part IV, Chapter 2: Rate Lock and Committing, Section 204: Commitments. , the BorrowerBorrowerPerson who is the obligor per the Note. or any Key PrincipalKey PrincipalPerson who controls and/or manages the Borrower or the Property, is critical to the successful operation and management of the Borrower and the Property, and/or may be required to provide a Guaranty. has owning or managing residential rental properties, based on the following:

Similar in Size

Unit Range

Small Properties
  • 1 multifamily property with 5 – 50 units, or
  • concurrently owning or managing at least 10 single-family rental units.

Medium Properties

1 multifamily property with 51 – 100 units.

Large Properties

1 multifamily property with 101 or more units.

As of the Commitment DateCommitment DateDate a Commitment is confirmed by Fannie Mae per Part IV, Chapter 2: Rate Lock and Committing, Section 204: Commitments. , a non-Local BorrowerLocal BorrowerFor Small Mortgage Loans, a Borrower or at least 1 Key Principal of the Borrower that has a primary residence located within 200 miles of the Property. must have at least 2 years of multifamily ownership or property management experience with a property similar in size or larger than the PropertyPropertyMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). .

PropertyPropertyMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). management requirements are as follows.

Property Size

Professional property management or qualified on-site manager required if...

Less than 10 residential units
  • non-Local BorrowerLocal BorrowerFor Small Mortgage Loans, a Borrower or at least 1 Key Principal of the Borrower that has a primary residence located within 200 miles of the Property. , or
  • Local BorrowerLocal BorrowerFor Small Mortgage Loans, a Borrower or at least 1 Key Principal of the Borrower that has a primary residence located within 200 miles of the Property. resides more than 100 miles from the PropertyPropertyMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). .

10 or more residential units
  • non-Local BorrowerLocal BorrowerFor Small Mortgage Loans, a Borrower or at least 1 Key Principal of the Borrower that has a primary residence located within 200 miles of the Property. , or
  • Local BorrowerLocal BorrowerFor Small Mortgage Loans, a Borrower or at least 1 Key Principal of the Borrower that has a primary residence located within 200 miles of the Property. with less than 2 years of experience with a property similar in size or larger.

 A professional property management company must have an office within 100 miles of the PropertyPropertyMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). when the BorrowerBorrowerPerson who is the obligor per the Note. or all Key PrincipalsKey PrincipalsPerson who controls and/or manages the Borrower or the Property, is critical to the successful operation and management of the Borrower and the Property, and/or may be required to provide a Guaranty.  primarily reside more than 100 miles from the PropertyPropertyMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). .

 Guidance

A professional property management company should use a written management agreement that complies with Part II, Chapter 1: Attributes and Characteristics, Section 112: Property Management and Agreement.

A qualified on-site manager

  • is not required to be a PropertyPropertyMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). resident,
  • should generally be on-site during normal business hours, and
  • for at least 2 years the before the Commitment DateCommitment DateDate a Commitment is confirmed by Fannie Mae per Part IV, Chapter 2: Rate Lock and Committing, Section 204: Commitments. , should have either successfully managed the PropertyPropertyMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). or have demonstrated management experience with a property similar in size or larger than the PropertyPropertyMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). .
Section 907

Property Condition
Section 908

Replacement Reserve

Requirements

You must require either full funding or alternative funding (per Part II, Chapter 4: Lease Audits, Inspections, and Reserves, Section 406.03: Alternative Replacement Reserve Funding) of the Replacement ReserveReplacement ReserveCustodial Account the Borrower funds during the Mortgage Loan term for Replacements. for any TierTierTier 1, Tier 2, Tier 3, or Tier 4 per the Multifamily Underwriting Standards (Form 4660). 2 Small Mortgage LoanSmall Mortgage LoanMortgage Loan with an original loan amount less than or equal to $9 million. on a

  • PropertyPropertyMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). not located in an Eligible MSA per Form 4660, or
  • Rent-Stabilized PropertyRent-Stabilized PropertyProperty where rent increases on more than 50% of the residential units are limited by state or local statutory controls, not by an Affordable Regulatory Agreement. located in the New York-Newark-Jersey City, NY-NJ-PA MSAMSAGeographic delineation for a metropolitan area determined by the U.S. Census Bureau. .

For all other Small Mortgage LoansSmall Mortgage LoansMortgage Loan with an original loan amount less than or equal to $9 million. , you must determine whether to require funding of the Replacement ReserveReplacement ReserveCustodial Account the Borrower funds during the Mortgage Loan term for Replacements. .

If you do not require full funding, then you and the BorrowerBorrowerPerson who is the obligor per the Note. must execute either

  • the appropriate Modifications to Multifamily Loan and Security Agreement (Replacement Reserve – Partially or Fully Waived) (Form 6220), or
  • the Modifications to Multifamily Loan and Security Agreement (Replacement Reserve – Alternative Funding) (Form 6221).
Section 909

Environmental Matters and Inspections

Requirements

Before the Commitment DateCommitment DateDate a Commitment is confirmed by Fannie Mae per Part IV, Chapter 2: Rate Lock and Committing, Section 204: Commitments. , you must:

  • Obtain an Environmental Screening of the PropertyPropertyMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). using the ASTMASTMAmerican Society for Testing Materials E-1528 protocol.
  • Perform a physical site inspection of the PropertyPropertyMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). .
  • Notify the AppraiserAppraiserPerson engaged to estimate a Property’s market value per USPAP. of any Recognized Environmental Condition or “non-scope considerations” that would impact the value of the PropertyPropertyMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). .
  • Determine if an O&MO&MRequired plan for remediating a Recognized Environmental Condition or Business Enivronmental Risk as described in Environmental Due Diligence Requirements (Form 4251). plan is appropriate to address a Recognized Environmental Condition.
  • Determine if the state where the PropertyPropertyMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). is located has an environmental super-lien statute, and ensure that the PropertyPropertyMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). conditions are not likely to result in such a lien.
  • Disclose any actual or suspected environmental conditions not disclosed in the ESAESAInvestigation and resulting report (Phase I ESA or Phase II ESA) conducted per Environmental Due Diligence Requirements (Form 4251), identifying if a Property has Recognized Environmental Conditions or Business Environmental Risks. .
  • Evaluate the potential risk posed by any Recognized Environmental Conditions that could result in loss or liability to you, the BorrowerBorrowerPerson who is the obligor per the Note. , the PropertyPropertyMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). , or Fannie Mae.
  • Obtain a copy of any Phase I ESAPhase I ESAEnvironmental Site Assessment conducted per the current ASTM E-1527 standard and the resulting report. that the BorrowerBorrowerPerson who is the obligor per the Note. has in its possession or can obtain.
  • Determine, based on the findings of the environmental screening and analysis, whether a Phase I ESAPhase I ESAEnvironmental Site Assessment conducted per the current ASTM E-1527 standard and the resulting report. is required and, if so, contract for the report.
  • When indicated, contract for a Phase II ESAPhase II ESAEnvironmental Site Assessment conducted per the current ASTM E-1903 standard, or any other post-Phase I ESA, and the resulting report. .
  • Disclose any knowledge of actual or suspected environmental problems.

Guidance

You may contract portions of your environmental responsibilities to qualified parties.  The environmental screening and analysis may be completed by:

  • the engineer conducting the PCAPCAAssessment of the Property's physical condition and historical operation. ;
  • a qualified employee; or
  • a qualified non-employee.

Operating Procedures

If a qualified individual performs the environmental screening and analysis, you must:

  • Identify the individual.
  • Ensure that the individual certifies each environmental analysis.
  • Submit a certified copy of each environmental analysis with Folder II of the Multifamily Mortgage Loan Delivery Package Table of Contents (Form 6502.Folder.II).
Section 910

Borrower, Key Principals, Guarantors, and Principals

Requirements

Except as described below, you must comply with all requirements for the BorrowerBorrowerPerson who is the obligor per the Note. , Key PrincipalsKey PrincipalsPerson who controls and/or manages the Borrower or the Property, is critical to the successful operation and management of the Borrower and the Property, and/or may be required to provide a Guaranty. , GuarantorsGuarantorsKey Principal or other Person executing a Payment Guaranty, Non-Recourse Guaranty, or any other Mortgage Loan guaranty. , and PrincipalsPrincipalsPerson who owns or controls, in the aggregate, directly or indirectly (together with that Person's Immediate Family Members, if an individual), specified interests in the Borrower per Part I, Chapter 3: Borrower, Guarantor, Key Principals, and Principals, Section 303: Key Principals, Principals,… in Part I, Chapter 3: Borrower, Guarantor, Key Principals, and Principals.

910.01

Borrower Organizational Structure

Requirements

Any individual BorrowerBorrowerPerson who is the obligor per the Note. must not be a Foreign PersonForeign PersonPerson who is not: a United States citizen; a legal permanent resident; or an entity organized and existing under the laws of the United States of America, or its states or territories.  .

Although a single asset entity is preferred, the BorrowerBorrowerPerson who is the obligor per the Note. may be a multi-asset entity.

Guidance

If the BorrowerBorrowerPerson who is the obligor per the Note. owns multiple assets, then you should obtain and underwrite the Borrower’sBorrower’sPerson who is the obligor per the Note. complete schedule of owned real estate assets.  Your underwriting should include the nature, location, cash flows, outstanding mortgage debt, and contingent liabilities of each asset.

910.02

Co-Tenant Borrowers

Requirements

If a Co-Tenant BorrowerCo-Tenant BorrowerBorrower consisting of tenants-in-common that own the Property in equal or unequal shares. is not an individual or a trust holding title to assets of an individual, each Key PrincipalKey PrincipalPerson who controls and/or manages the Borrower or the Property, is critical to the successful operation and management of the Borrower and the Property, and/or may be required to provide a Guaranty. must execute the applicable GuarantyGuarantyPayment Guaranty, Non-Recourse Guaranty, or other guaranty by a Guarantor for the Mortgage Loan. per Part III, Chapter 9: Small Mortgage Loans, Section 902: Key Principal Guaranty Obligation.

A Co-Tenant BorrowerCo-Tenant BorrowerBorrower consisting of tenants-in-common that own the Property in equal or unequal shares.  must be

  • an individual who is not a Foreign PersonForeign PersonPerson who is not: a United States citizen; a legal permanent resident; or an entity organized and existing under the laws of the United States of America, or its states or territories.  ,
  • a single-asset entity, or
  • a multi-asset entity.
910.03

Key Principals

Requirements

You must ensure that any individual Key PrincipalKey PrincipalPerson who controls and/or manages the Borrower or the Property, is critical to the successful operation and management of the Borrower and the Property, and/or may be required to provide a Guaranty. is not a Foreign PersonForeign PersonPerson who is not: a United States citizen; a legal permanent resident; or an entity organized and existing under the laws of the United States of America, or its states or territories.  .

910.04

Principals

Requirements

For Small Mortgage LoansSmall Mortgage LoansMortgage Loan with an original loan amount less than or equal to $9 million. , a PrincipalPrincipalPerson who owns or controls, in the aggregate, directly or indirectly (together with that Person's Immediate Family Members, if an individual), specified interests in the Borrower per Part I, Chapter 3: Borrower, Guarantor, Key Principals, and Principals, Section 303: Key Principals, Principals,… is any person or entity that holds direct or indirect interests of 50% or more in the BorrowerBorrowerPerson who is the obligor per the Note. .

910.05

Financial Statements

Requirements

You must:

  • obtain
    • a schedule of owned real estate assets, and
    • signed financial statements; and
  • verify liquid assets for the 3-months immediately before the Borrower'sBorrower'sPerson who is the obligor per the Note. loan application by obtaining copies complying with the aging requirements per Part I, Chapter 3: Borrower, Guarantor, Key Principals, and Principals of all
    • bank statements, and
    • investment portfolio statements.
910.06

Net Worth and Liquid Assets

Requirements

You must ensure that:

  • the combined net worth of the BorrowerBorrowerPerson who is the obligor per the Note. and all Key PrincipalsKey PrincipalsPerson who controls and/or manages the Borrower or the Property, is critical to the successful operation and management of the Borrower and the Property, and/or may be required to provide a Guaranty. equals or exceeds the original principal amount of the Small Mortgage LoanSmall Mortgage LoanMortgage Loan with an original loan amount less than or equal to $9 million. ; and
  • the combined post-closing liquid assets (excluding any Small Mortgage LoanSmall Mortgage LoanMortgage Loan with an original loan amount less than or equal to $9 million. cash-out proceeds) of the BorrowerBorrowerPerson who is the obligor per the Note. and all Key PrincipalsKey PrincipalsPerson who controls and/or manages the Borrower or the Property, is critical to the successful operation and management of the Borrower and the Property, and/or may be required to provide a Guaranty. equal at least 9 monthly payments of P&IP&IPrincipal and interest on the Small Mortgage LoanSmall Mortgage LoanMortgage Loan with an original loan amount less than or equal to $9 million. .

Guidance

You should:

  • for net worth, consider the impact of current, long-term, and contingent liabilities compared to the Small Mortgage LoanSmall Mortgage LoanMortgage Loan with an original loan amount less than or equal to $9 million. amount; and
  • for liquidity, exclude the following unless you have reasonable justification:
    • retirement funds (such as IRAs and 401Ks); and
    • promissory notes payable to the BorrowerBorrowerPerson who is the obligor per the Note. or a Key PrincipalKey PrincipalPerson who controls and/or manages the Borrower or the Property, is critical to the successful operation and management of the Borrower and the Property, and/or may be required to provide a Guaranty. , whether secured or unsecured.
Section 911

Credit Reports