Chapter 9

Small Mortgage Loans

Section 901

Generally
901.01

Description

Requirements

A Small Mortgage LoanSmall Mortgage LoanMortgage Loan with an original loan amount less than or equal to $6 million and underwritten per Part III, Chapter 9: Small Mortgage Loans. is a Mortgage LoanMortgage LoanMortgage debt obligation evidenced, or when made will be evidenced, by the Loan Documents, or  a mortgage debt obligation with a Fannie Mae credit enhancement. with an original loan amount of less than or equal to $6 million and underwritten per this Chapter.

901.02

Applicability

Requirements

You may use this Chapter to underwrite conventional Mortgage LoansMortgage LoansMortgage debt obligation evidenced, or when made will be evidenced, by the Loan Documents, or  a mortgage debt obligation with a Fannie Mae credit enhancement. and the following products:

  • MH CommunitiesMH CommunitiesResidential real estate development with lots on which manufactured homes are located, together with amenities, utility services, landscaping, roads, and other infrastructure. ;
  • MAHMAHProperty encumbered by a regulatory agreement, land use restriction agreement, extended use agreement, or similar restriction that limits rents that can be charged to tenants, or imposes income limits on tenants. PropertiesPropertiesMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). ; and
  • market rate CooperativeCooperativeMultifamily residential property owned by a Cooperative Organization. PropertiesPropertiesMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). that are not Limited Equity Cooperative PropertiesLimited Equity Cooperative PropertiesCooperative Organization that has income, rent, or equity build-up restriction (not including any transfer taxes), which may be dictated by a governmental entity, a third-party capital provider, or its own organizational documents. .
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 PrincipalAny Person 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 who 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 $6 million and underwritten per Part III, Chapter 9: Small Mortgage Loans. 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 $6 million and underwritten per Part III, Chapter 9: Small Mortgage Loans. 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
905.01

Small Mortgage Loan Underwritten NCF (Underwritten NCF)

Requirements

You must calculate Underwritten NCFUnderwritten NCFNet Cash Flow as adjusted by the Lender per Part II, Chapter 2: Valuation and Income, Section 202: Income Analysis and the applicable products and features in Part III. as follows:

REQUIRED UNDERWRITTEN NET CASH FLOW
(SMALL MORTGAGE LOANS)

Item

Function

Description
CALCULATION OF NET RENTAL INCOME

1

  

GROSS RENTAL INCOME – the lesser of

 

  • actual rents in place, or
  • market rents for occupied units, plus market rents for vacant units based on a current rent roll (multiplied by 12).1

2

PLUS

To the extent deducted as an operating expense, rents for other non-revenue units.  For example:

 

  • model units deducted in the “model apartment” operating expense in the “general and administrative” category;
  • owner-occupied units2 deducted in the “general and administrative” category; and
  • employee units3 deducted in the “employee” operating expense in the “payroll and benefits” category.
 

EQUALS

GROSS POTENTIAL RENT (GPR)

3

MINUS

Premiums and corporate premiums.

4

MINUS

Physical vacancy – market rents for vacant units based on a current rent roll (multiplied by 12).4

5

MINUS

Concessions – the aggregate amount of forgone residential rental income resulting from incentives granted to tenants for signing leases, such as free rent for 1 or more months, move-in allowance, etc.4

6

MINUS

Bad debt – the aggregate amount of unpaid rental income determined to be uncollectable:  include any adjustments to other income for bad debt.4
 

EQUALS

NET RENTAL INCOME (NRI)

1 (a) In the New York-Northern New Jersey-Long Island, NY-NJ-PA MSA, you may use actual rents in place plus projected increases for rent-regulated units that have rent increases scheduled before, or through, the first 12 months of the loan term.  Any units subject to rent regulation on the Commitment Date must be treated as rent-regulated for this calculation even if converting to market rate after origination.

 

(b) For Properties located in New York City that are currently subject to the J51 Tax Incentive Program, you must ensure that the Gross Rental Income complies with Part II, Chapter 2: Valuation and Income, Section 202: Income Analysis.

 

2 You must deduct owner-occupied units as an expense unless

 

  • the Mortgage LoanMortgage LoanMortgage debt obligation evidenced, or when made will be evidenced, by the Loan Documents, or  a mortgage debt obligation with a Fannie Mae credit enhancement. is TierTierTier 1, Tier 2, Tier 3, or Tier 4 per the Multifamily Underwriting Standards (Form 4660). 3 or TierTierTier 1, Tier 2, Tier 3, or Tier 4 per the Multifamily Underwriting Standards (Form 4660). 4, or
  • 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). contains 24 or more units.

 

    3 You must deduct as an expense the portion of the market rent used as employee compensation.

     

    4 The total of Items 4, 5, and 6 must be greater than or equal to

     

    • 3% of GPR for the New York-Northern New Jersey-Long Island, NY-NJ-PA and San Francisco-Oakland-Fremont, CA, Metropolitan Statistical Areas (MSAs), if supported by market and property operations, or
    • 5% of GPR for all other MSAs.

    CALCULATION OF OTHER INCOME

    7

    PLUS

    Actual other income (except premiums and corporate premiums) generated through ongoing operations.  The income must:

     

    • be stable;
    • be common in the market;
    • exclude one-time extraordinary, non-recurring items; and
    • be supported by prior years.

    You must assess the individual month other income within the prior full-year operating statement; or at a minimum, an operating statement covering at least the trailing 6 months (annualized).

    CALCULATION OF COMMERCIAL INCOME

    8

    PLUS

    Actual income from occupied commercial space (and parking revenue for commercial spaces, if applicable).

    9

    PLUS

    Actual income from STRSTRProperty permitting leases or master leases (including subleases, licenses, and other possessory interests, whether oral or written) of an individual dwelling unit where the intended occupancy of the unit is for less than 30 days, regardless of the stated lease term, such as through a peer-to-peer… units.

    10

    MINUS

    10% of the actual commercial income (total of Items 8 plus 9).5

    5 If net commercial income is greater than 20% of EGI, then reduce to 20% of EGI.

    11

    PLUS

    Laundry and vending, parking, and all other income as detailed in Part II, Chapter 2: Valuation and Income, Section 202: Income Analysis.
     

    EQUALS

    EFFECTIVE GROSS INCOME (EGI)

    CALCULATION OF OPERATING EXPENSES

    12

    MINUS

    Line-by-line stabilized operating expenses.  Stabilized operating expenses are the expenses during normal ongoing PropertyPropertyMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). operations, not affected by a lease-up, rehabilitation, or other short-term positive or negative factors.  Non-recurring, extraordinary operating expenses must not be included.

     

    You must assess:

     

    • past operating history;
    • the appraiser’s expense analysis;
    • all information available to you (including PropertyPropertyMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). contracts, utility bills, real estate tax assessments, insurance policies, and comparable assets); and
    • the BorrowerBorrowerPerson who is the obligor per the Note. ’s budget (in the case of an acquisition).

    You must analyze historical operations at 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). and apply an appropriate increase over the prior year’s operations in determining an estimate.

     

    All expenses associated with STRsSTRsProperty permitting leases or master leases (including subleases, licenses, and other possessory interests, whether oral or written) of an individual dwelling unit where the intended occupancy of the unit is for less than 30 days, regardless of the stated lease term, such as through a peer-to-peer… must be underwritten in their respective expense line items.  These expenses include cleaning, furnishing, and repairs.

     

    You cannot include any operating expense that reflects blanket or bulk discounts that benefit the BorrowerBorrowerPerson who is the obligor per the Note. or Key PrincipalKey PrincipalAny Person 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 who may be required to provide a Guaranty. (e.g., blanket property or casualty insurance policies, or utilities purchased in bulk).  Operating expenses must reflect 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). expenses on a stand-alone basis.

    13

    MINUS

    Property management fee equal to the greatest of:

     

    • 3% of EGIEGIOn an annual basis or any specified period, the total of Net Rental Income plus other income per Part II, Chapter 2: Valuation and Income, Section 202: Income Analysis and the applicable products and features in Part III. ;
    • actual property management fee (exclude any portion of a property management fee that is subordinated to the Mortgage LoanMortgage LoanMortgage debt obligation evidenced, or when made will be evidenced, by the Loan Documents, or  a mortgage debt obligation with a Fannie Mae credit enhancement. ); or
    • market property management fee.

    14

    MINUS

    Real estate taxes based on the greatest of:

     

    • actual future tax bill(s) covering a full calendar year;
    • prior full year’s taxes multiplied by 103% (the 3% trending is not required for trailing 12-month or year-to-date annualized expenses); or
    • in California, the greater of the Small Mortgage LoanSmall Mortgage LoanMortgage Loan with an original loan amount less than or equal to $6 million and underwritten per Part III, Chapter 9: Small Mortgage Loans. amount or the assessed value, multiplied by the millage rate, plus any special assessments.

    You must consider any automatic reassessment upon acquisition in the next 12-month period.

     

    You may use a reduced real estate tax payment if 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). ’s real estate tax abatements, exemptions, or deferrals meet the requirements in Part II, Chapter 2: Valuation and Income, Section 202: Income Analysis.

    15

    MINUS

    Insurance equal to:

     

    • the quoted expense, for insurance policies with a bona fide written quote from a reputable broker for a new 12-month policy; or
    • 110% of the current expense, for insurance policies with a remaining term less than 6 months.

    16

    MINUS

    Utilities, water and sewer, repairs and maintenance, payroll and benefits, advertising and marketing, professional fees, general and administrative, ground rent, and all other expenses as detailed in Part II, Chapter 2: Valuation and Income, Section 202: Income Analysis.
     

    EQUALS

    UNDERWRITTEN NET OPERATING INCOME (UNDERWRITTEN NOI)

    17

    MINUS

    Replacement ReserveReplacement ReserveCustodial Account funded during the Mortgage Loan term for major maintenance and replacing capital items per the Loan Documents. expense equal to at least6

     

    • $200 per unit, for 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). with an overall rating of 1,
    • $250 per unit, for 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). with an overall rating of 2, or
    • $300 per unit, for 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). with an overall rating of 3.

    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). ratings are the ratings reported on the Comprehensive Assessment Addendum (“Comp Assmt Addendum”) tab of the MBAMBAMortgage Bankers Association Standard Inspection Form.
     

    EQUALS

    UNDERWRITTEN NET CASH FLOW (UNDERWRITTEN NCF)

    6 If a PCA was completed, the Replacement Reserve must equal the amount required per Part II, Chapter 4: Inspections and Reserves, subject to a minimum of $200 per unit.
    905.02

    Underwritten DSCR

    Requirements

    You must calculate Underwritten DSCRUnderwritten DSCRRatio of Underwritten Net Cash Flow to the annual debt service for a Mortgage Loan amount based on a level debt service payment with the applicable amortization, and calculated per Part II, Chapter 2: Valuation and Income, Section 202: Income Analysis, as adjusted for the applicable products and… per the following table.

    UNDERWRITTEN DSCR1,2
    Item Function Description
    1   Underwritten NCFUnderwritten NCFNet Cash Flow as adjusted by the Lender per Part II, Chapter 2: Valuation and Income, Section 202: Income Analysis and the applicable products and features in Part III. as calculated in Part III, Chapter 9: Small Mortgage Loans, Section 905.01: Small Mortgage Loan Underwritten NCF (Underwritten NCF).
    2 DIVIDED BY

    Annual debt service for the Mortgage LoanMortgage LoanMortgage debt obligation evidenced, or when made will be evidenced, by the Loan Documents, or  a mortgage debt obligation with a Fannie Mae credit enhancement. amount. 

     

    You must base debt service on a level debt service payment, including amortization, and the greater of

     

    • the actual note rate, or
    • the required Underwriting Interest Rate Floor.3

    1 For a Small Mortgage Loan secured by an MAH Property underwritten per this Chapter, you must comply with the minimum DSCR requirement for an MAH Property per Form 4660.

     

    2 For shorter amortization terms, you must

     

    • calculate the Underwritten DSCR based on the shorter period, and
    • comply with the minimum DSCR requirement per Form 4660.

    The mandatory NRI adjustments in Part II, Chapter 2: Valuation and Income, for Properties with declining NRI do not apply.

     

    3 For a Small Mortgage Loan secured by an MAH Property underwritten per this Chapter, you must comply with the required Underwriting Interest Rate Floor for an MAH Property per Form 4660.
    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 PrincipalAny Person 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 who may be required to provide a Guaranty. has owning or managing at least 1 multifamily property that is similar in size to 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). , based on the following:

    Similar in Size

    Unit Range

    Small Properties

    5 – 50 units

    Medium Properties

    51 – 100 units

    Large Properties

    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 100 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 100 miles of the Property. .

    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 100 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 100 miles of the Property. with less than 2 years of experience with a property similar in size or larger.

     Guidance

    A professional property management company should 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). and use a written management agreement that complies with Part II, Chapter 1: Attributes and Characteristics, Section 111: 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
    907.01

    Site Inspection by Lender or Other Third Party

    Requirements

    You must ensure:

    • a physical 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). is performed (including any PropertyPropertyMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). securing a Small Mortgage LoanSmall Mortgage LoanMortgage Loan with an original loan amount less than or equal to $6 million and underwritten per Part III, Chapter 9: Small Mortgage Loans. that is also a Choice Refinance LoanChoice Refinance LoanMortgage Loan refinancing a Portfolio Mortgage Loan using streamlined underwriting per Part III, Chapter 18: Choice Refinance Loans. );
    • the physical inspection addresses special hazards, zoning, building and fire code violations, and regulatory compliance per the Instructions for Performing a Multifamily Property Condition Assessment (Form 4099); 
    • the person performing the inspection and completing the MBAMBAMortgage Bankers Association  Standard Inspection Form meets the requirements for a PCA ConsultantPCA ConsultantIndividual or firm conducting a PCA and preparing a PCA Report. per Part II, Chapter 4: Inspections and Reserves, Section 402.03: Conducting the PCA, and is:
      • your employee;
      • an appraiser; or
      • a third-party inspector.

    If a non-employee appraiser or other third-party inspector performs the physical inspection, you must also have an employee visit 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). .

    The site inspection must provide you with enough information to complete the MBAMBAMortgage Bankers Association Standard Inspection Form, including:

    • an assessment of the current condition 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). ;
    • an identification and cost estimate of any Immediate Repairs, which must be included in the appropriate Completion/Repair AgreementCompletion/Repair AgreementThe 4000 series Completion/Repair Security Agreement (Form 4505), or other agreement approved by Fannie Mae, that evidences the:  Borrower’s agreement to perform Completion/Repairs and other identified capital improvements; terms for funding the repairs, maintenance, or capital items; and …; and
    • a general estimate of anticipated replacement and major maintenance needs.

    For any PropertyPropertyMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). consisting of multiple buildings, the site inspection must address the condition of all roofs, HVAC equipment, exterior façades, parking lots, exterior walkways, and balconies.

    If a Mortgage LoanMortgage LoanMortgage debt obligation evidenced, or when made will be evidenced, by the Loan Documents, or  a mortgage debt obligation with a Fannie Mae credit enhancement. has a term greater than 10 years, then you must ensure that a new site inspection is performed in the 10th year of the loan term.

    The date of the site inspection must meet the timing requirements for a PCAPCAAssessment of the current physical condition and historical operation of the Property. in Part II, Chapter 4: Inspections and Reserves, Section 402: Property Condition Assessment (PCA).

    You must not DeliverDeliverSubmission of all correct, accurate, and certifiable documents, data, and information with all applicable documents properly completed, executed, and recorded as needed, and any deficiencies resolved to Fannie Mae’s satisfaction. any Small Mortgage LoanSmall Mortgage LoanMortgage Loan with an original loan amount less than or equal to $6 million and underwritten per Part III, Chapter 9: Small Mortgage Loans. secured by 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). that has:

    907.02

    Site Inspection by Borrower

    Requirements

    You must ensure that the BorrowerBorrowerPerson who is the obligor per the Note. or the Key PrincipalKey PrincipalAny Person 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 who may be required to provide a Guaranty. :

    • Conducts a physical 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). .
    • Certifies in the Multifamily Underwriting Certificate (Form 6460) that the physical inspection has been performed.
    907.03

    PCA

    Requirements

    A PCAPCAAssessment of the current physical condition and historical operation of the Property. is required:

    • if the site inspection
      • notes structural or physical concerns, or
      • results in an overall rating of 3 being reported on the Comp Assmt Addendum tab of the MBAMBAMortgage Bankers Association Standard Inspection Form; or
    • when a Replacement ReserveReplacement ReserveCustodial Account funded during the Mortgage Loan term for major maintenance and replacing capital items per the Loan Documents. is required per Part III, Chapter 9: Small Mortgage Loans, Section 908: Replacement Reserve.

    Guidance

    When a PCAPCAAssessment of the current physical condition and historical operation of the Property. is required, you may use:

    Section 908

    Replacement Reserve

    Requirements

    You must require either full funding or alternative funding (per Part II, Chapter 4: Inspections and Reserves, Section 404.03: Alternative Replacement Reserve Funding) of the Replacement ReserveReplacement ReserveCustodial Account funded during the Mortgage Loan term for major maintenance and replacing capital items per the Loan Documents. 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 $6 million and underwritten per Part III, Chapter 9: Small Mortgage Loans. 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 4660Form 4660Multifamily Underwriting Standards identifying Pre-Review Mortgage Loans and containing the minimum underwriting requirements (e.g., debt service coverage ratio, loan to value ratio, interest only, underwriting floors, etc.) for all Mortgage Loans. , 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 $6 million and underwritten per Part III, Chapter 9: Small Mortgage Loans. , you must determine whether to require funding of the Replacement ReserveReplacement ReserveCustodial Account funded during the Mortgage Loan term for major maintenance and replacing capital items per the Loan Documents. .

    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 Appraiser 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&MWritten plan, document, or agreement containing ongoing operating, maintenance, or monitoring actions for the Property or its Improvements. 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 ESAESAReport (either a Phase I ESA or a Phase II ESA) identifying whether a Property is subject to 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 report and site assessment performed according to the process described in current ASTM E 1527, including any report summarizing the conclusions of the assessment. 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 report and site assessment performed according to the process described in current ASTM E 1527, including any report summarizing the conclusions of the assessment. is required and, if so, contract for the report.
    • When indicated, contract for a Phase II ESAPhase II ESAInvestigation performed according to current ASTM E 1903, or investigation other than a Phase I ESA, that may include analyzing soil, ground water, or building materials for contaminants, including any report summarizing the conclusions of the assessment. .
    • 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 current physical condition and historical operation of the Property. (if one was required);
    • 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).
    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 PrincipalsAny Person 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 who 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 specified interests in the Borrower per Part I, Chapter 3: Borrower, Guarantor, Key Principals, and Principals, Section 303: Key Principals, Principals, and Guarantors. 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 BorrowerBorrowerPerson who is the obligor per the Note. ’s 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 PrincipalAny Person 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 who 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 PrincipalAny Person 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 who 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 $6 million and underwritten per Part III, Chapter 9: Small Mortgage Loans. , a PrincipalPrincipalPerson who owns or controls specified interests in the Borrower per Part I, Chapter 3: Borrower, Guarantor, Key Principals, and Principals, Section 303: Key Principals, Principals, and Guarantors. 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.

    Instead of signed financial statements, you may obtain an equivalent signed net worth statement or personal financial statement (such as a form bank application from the BorrowerBorrowerPerson who is the obligor per the Note. certifying to its financial condition) that conforms to the aging requirements in Part I, Chapter 3: Borrower, Guarantor, Key Principals, and Principals.

    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 PrincipalsAny Person 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 who 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 $6 million and underwritten per Part III, Chapter 9: Small Mortgage Loans. ; 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 $6 million and underwritten per Part III, Chapter 9: Small Mortgage Loans. cash-out proceeds) of the BorrowerBorrowerPerson who is the obligor per the Note. and all Key PrincipalsKey PrincipalsAny Person 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 who 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 $6 million and underwritten per Part III, Chapter 9: Small Mortgage Loans. .

    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 $6 million and underwritten per Part III, Chapter 9: Small Mortgage Loans. amount;
    • 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 PrincipalAny Person 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 who may be required to provide a Guaranty. , whether secured or unsecured; and
    • verify liquid assets for the 2-month period immediately preceding the BorrowerBorrowerPerson who is the obligor per the Note. ’s loan application by obtaining copies of all applicable:
      • bank statements; and
      • investment portfolio statements.
    Section 911

    Credit Reports
    911.01

    Credit Report

    Requirements

    Within 90 days 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 credit reports for all individual

    • BorrowersBorrowersPerson who is the obligor per the Note. ,
    • Key PrincipalsKey PrincipalsAny Person 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 who 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 specified interests in the Borrower per Part I, Chapter 3: Borrower, Guarantor, Key Principals, and Principals, Section 303: Key Principals, Principals, and Guarantors.  

    from at least 2 of the following credit information services:

    • Equifax;
    • Experian; or
    • TransUnion.
    911.02

    FICO Scoring

    Requirements

    You must ensure that all individual BorrowersBorrowersPerson who is the obligor per the Note. , Key PrincipalsKey PrincipalsAny Person 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 who 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 specified interests in the Borrower per Part I, Chapter 3: Borrower, Guarantor, Key Principals, and Principals, Section 303: Key Principals, Principals, and Guarantors. meet the Minimum FICO Requirement in Form 4660Form 4660Multifamily Underwriting Standards identifying Pre-Review Mortgage Loans and containing the minimum underwriting requirements (e.g., debt service coverage ratio, loan to value ratio, interest only, underwriting floors, etc.) for all Mortgage Loans. .

    Guidance

    To determine that the Minimum FICO Requirement is met, follow these guidelines:

    If…

    Then…

    You obtain credit reports from 2 of the 3 credit information services for a Borrower, Key Principal, Guarantor, or Principal

    Use the lower of the 2 scores.

    You obtain credit reports from all 3 credit information services, for a Borrower, Key Principal, Guarantor, or Principal

    Use the middle score.
    If... Then...

    A Borrower, Key Principal, or Principal is married to another Borrower, Key Principal, Guarantor, or Principal

    Use the lower FICO score of the 2 married individuals.

    A Small Mortgage Loan has multiple individual Borrowers, Key Principals, Guarantors, or Principals

    Use the average of their respective FICO scores.
    911.03

    Reviewing the Credit Report

    Requirements

    You must analyze the credit report for each individual BorrowerBorrowerPerson who is the obligor per the Note. , Key PrincipalKey PrincipalAny Person 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 who may be required to provide a Guaranty. , GuarantorGuarantorKey Principal or other Person executing a Payment Guaranty, Non-Recourse Guaranty, or any other Mortgage Loan guaranty. , and PrincipalPrincipalPerson who owns or controls specified interests in the Borrower per Part I, Chapter 3: Borrower, Guarantor, Key Principals, and Principals, Section 303: Key Principals, Principals, and Guarantors. . 

    If the answer to any of the following Guidance questions is “yes”, then the BorrowerBorrowerPerson who is the obligor per the Note. , Key PrincipalKey PrincipalAny Person 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 who may be required to provide a Guaranty. , GuarantorGuarantorKey Principal or other Person executing a Payment Guaranty, Non-Recourse Guaranty, or any other Mortgage Loan guaranty. , or PrincipalPrincipalPerson who owns or controls specified interests in the Borrower per Part I, Chapter 3: Borrower, Guarantor, Key Principals, and Principals, Section 303: Key Principals, Principals, and Guarantors. must give you satisfactory explanations, even if they meet the Minimum FICO Requirement.

    Guidance

    As you analyze the credit report, consider the following questions:

    • Have any mortgage late payments occurred in the previous 36 months?
    • Have any revolving or installment late payments occurred within the previous 12 months?
    • Do you consider any of the credit card or other unsecured debt balances excessive?
    • Have any tax liens been filed or reported within the previous 5 years?
    • Have any discharged bankruptcies or mortgage foreclosures occurred within the previous 10 years?
    • Are there any outstanding judgments or collections higher than $5,000?