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Fannie Mae ARM 7-6 Loans
Fannie Mae ARM 7-6 Loans are non-recourse, start at just $750,000, permit LTVs up to 80%, and can be converted to fixed-rate financing between the second and fifth year of the loan.
Multifamily investors who want adjustable-rate Fannie Mae financing might find the perfect fit with Fannie Mae's ARM 7-6 loan.
Just like the ARM 7-4, the ARM 7-6 has a maximum LTV allowance of 80%, and can be converted to a fixed-rate loan anytime between the first day of the second year and the first day of the sixth year of the loan.
Also, just like the ARM 7-4, ARM 7-6 loans are mostly non-recourse, and they are fully assumable with lender approval and a 1% fee.
Keep reading below to learn more, or click here to download our easy-to-read Fannie Mae ARM 7-6 loan term sheet.
Sample Fannie Mae Terms for ARM 7-6 Loans in 2024
Size: Varies
Terms: 7 years
Amortization: Up to 30 years (interest-only options available for eligible borrowers)
Interest Rate: Based on the 30-day average SOFR plus a margin
Interest Rate Cap: Determined at rate lock, interest rates cannot increase or decrease more than 1.00% per month
Maximum LTV: 80%
Minimum DSCR: 1.00x (at max. lifetime interest rate)
Recourse: Most loans are non-recourse with standard “bad boy” carve-outs for fraud and other bad acts, loans less than $3 million may be recourse in some areas
Prepayment Options: 1-year lockout, then a 1% prepayment premium during the adjustable-rate period, though this is waived for the last three months
Occupancy Requirements: 85% physical occupancy, 70% economic occupancy, 90% physical occupancy for loans under $3 million
Commercial Space Limits: Commercial space must be no more than 35% of the net rentable area and must produce no more than 20% of the property's income
How Does the Fixed-Rate Conversion Work?
The ARM 7-6 can be converted to a 10/9.5 or a 7/6.5 fixed yield maintenance loan any time between the first day of the second year of the loan and the first day of the sixth year of the loan, without any prepayment penalties. The amount of the loan cannot increase, but borrowers can apply for supplemental financing.
Advantages
Competitive interest rates
Most loans are non-recourse
Requires third-party reports including a property appraisal, property condition assessment, and a Phase I Environmental Assessment
Requires replacement reserves (minimum of $250/unit per year)
$12,500 application deposit and $3,000 processing fee required
1% origination fee also required
Does not allow for supplemental financing before conversion to a fixed-rate loan
Only 30 day rate lock commitments are available (for a fee)
Disadvantages
Case Study: Getting a Refi for a Boston Apartment Complex
Meet Michael, a seasoned multifamily property investor based in Boston, Massachusetts. Michael has a portfolio of properties under his belt, but one of his most valuable assets is a mid-size, market-rate apartment complex located in the heart of Boston's bustling South End neighborhood.
This apartment complex consists of four buildings, each four stories high, totaling 120 units. The property, a charming blend of historic character and modern amenities, has a consistently high occupancy rate, thanks to its prime location and Michael's excellent management.
Michael had bought this property several years ago for $22 million with a loan-to-value (LTV) of 75%, meaning his initial loan was $16.5 million. As the value of the property appreciated to an estimated $28 million, he saw an opportunity to refinance and take advantage of better loan terms, while also freeing up capital for other ventures.
After evaluating different options, Michael opted for Fannie Mae's ARM 7-6 loan. This loan offered him a combination of competitive interest rates and an adjustable rate that provided some flexibility with the changing market conditions.
With an LTV allowance of up to 80%, Michael was able to secure a loan of about $22.4 million based on the current property value. The seven-year term, along with the option for a 30-year amortization, provided a suitable timeline for his long-term investment strategy. Furthermore, the loan being mostly non-recourse was an added advantage, reducing Michael's personal liability.
The loan also came with the option to convert to a fixed-rate loan anytime between the first day of the second year and the first day of the sixth year of the loan, an option Michael liked for potential stability in the future.
While the loan required a series of third-party reports, a substantial application deposit, and origination fee, Michael considered these as part of the process of securing a loan that aligned well with his investment strategy. The opportunity to lock the interest rate for 30 days (for a fee) also allowed him to manage the market interest rate risk effectively.
By leveraging the Fannie Mae ARM 7-6 loan, Michael successfully refinanced his mid-size apartment complex, positioning his investment for continued success in Boston's thriving rental market.
This is a fictional case study provided for illustrative purposes.