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 $9 million. 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 $9 million.

Guidance

A Small Mortgage LoanSmall Mortgage LoanMortgage Loan with an original loan amount less than or equal to $9 million. may be underwritten per:

Part I and this Chapter; or
Part I and Part II, as for a conventional 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. .

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 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 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

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 203: Income Analysis and the applicable products and features in Part III. as follows:

for a MAH PropertyMAH PropertyProperty 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. , per Part III, Chapter 7: Multifamily Affordable Housing Properties, Section 703: Property Income and Underwriting; except that Replacement ReservesReplacement ReservesCustodial Account the Borrower funds during the Mortgage Loan term for Replacements. may be calculated per the table in this Section;
for a MH CommunityMH CommunityResidential real estate development with lots on which manufactured homes are located, together with amenities, utility services, landscaping, roads, and other infrastructure. , per Part III, Chapter 6: Manufactured Housing Communities, Section 606: Property Income and Underwritten NCF;
for a Cooperative PropertyCooperative PropertyMultifamily residential property owned by a Cooperative Organization. , per Part III, Chapter 8: Cooperative Properties, Section 804: Income Analysis; and
for all conventional Small Mortgage LoansSmall Mortgage LoansMortgage Loan with an original loan amount less than or equal to $9 million. , you must use the following table.

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 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, including 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 is calculated per Item 1 in Part II, Chapter 2: Valuation and Income, Section 203: Income Analysis. 2 You must deduct owner-occupied units as an expense unless the Mortgage Loan is Tier 3 or Tier 4, or the Property 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's other income within the prior full-year operating statement; or at a minimum, an operating statement covering at least the trailing 6 month's (annualized).
CALCULATION OF COMMERCIAL INCOME
8	PLUS	Actual income from leased and occupied commercial space per Part II, Chapter 1: Attributes and Characteristics, Section 109: Commercial Leases.
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 space income (total of Items 8 plus 9).⁵
11	PLUS	Commercial parking income (e.g., public parking) that does not exceed actual trailing 12-month collections.⁵
12	PLUS	Laundry and vending, and all other income per Part II, Chapter 2: Valuation and Income, Section 203: Income Analysis.
5 If net commercial income is greater than 20% of EGI, then reduce to 20% of EGI.
	EQUALS	EFFECTIVE GROSS INCOME (EGI)
CALCULATION OF OPERATING EXPENSES
13	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’sAppraiser’sPerson engaged to estimate a Property’s market value per USPAP. 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 Borrower'sBorrower'sPerson who is the obligor per the Note. budget (for an AcquisitionAcquisitionAny Purchase of either the: Property’s fee simple or leasehold interest via a deed transfer; or Controlling Interest in the Borrower. ). 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). ; apply an appropriate increase over the prior year’s operations in determining an estimate; and include all 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…-related expenses in their respective expense line items, including 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 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. (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.
14	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 203: Income Analysis and the applicable products and features in Part III. ; actual property management fee, provided you 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. , and include any known contractual fee increases occurring over the next 24 months; or Appraiser'sAppraiser'sPerson engaged to estimate a Property’s market value per USPAP. concluded market property management fee.
15	MINUS	Real estate taxes per Item 17(b) in Part II, Chapter 2: Valuation and Income, Section 203.01: Underwritten Net Cash Flow (Underwritten NCF).
16	MINUS	Insurance per Item 17(c) in Part II, Chapter 2: Valuation and Income, Section 203.01: Underwritten Net Cash Flow (Underwritten NCF).
17	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 203: Income Analysis.
	EQUALS	UNDERWRITTEN NET OPERATING INCOME (UNDERWRITTEN NOI)
18	MINUS	Replacement ReserveReplacement ReserveCustodial Account the Borrower funds during the Mortgage Loan term for Replacements. expense equal to the greatest of $200 per unit, if the Property'sProperty'sMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). overall rating is 1, $250 per unit, if the Property'sProperty'sMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). overall rating is 2, $300 per unit, if the Property'sProperty'sMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). overall rating is 3, or the amount required per Part II, Chapter 4: Lease Audits, Inspections, and Reserves. 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)

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 203: Income Analysis, as adjusted for the applicable products and… per the following table.

UNDERWRITTEN DSCR^1,2
Item	Function	Description
1		Underwritten NCFUnderwritten NCFNet Cash Flow as adjusted by the Lender per Part II, Chapter 2: Valuation and Income, Section 203: 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 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.

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

907.01	Lender's Site Inspection and Lease Audit

Requirements

You must:

comply with Part II, Chapter 4: Lease Audits, Inspections, and Reserves, Section 401: Lease Audit; and
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 $9 million. if the Property'sProperty'sMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). estimated Completion/RepairCompletion/RepairRepairs or capital item replacements and deferred maintenance: identified per the Property Condition Assessment; and required per the Completion/Repair Schedule, or Completion/Repair Agreement. costs are greater than 10% of the UPBUPBUnpaid Principal Balance .

907.02	Site Inspection by Borrower

Requirements

You must ensure that the BorrowerBorrowerPerson who is the obligor per the Note. or the 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. :

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

You must comply with Part II, Chapter 4: Lease Audits, Inspections, and Reserves, Section 404: Property Condition Assessment (PCA).

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

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 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,….

The credit reports must be 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 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,… meet the Minimum FICO Requirement in Form 4660.

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.
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 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. , GuarantorGuarantorKey Principal or other Person executing a Payment Guaranty, Non-Recourse Guaranty, or any other Mortgage Loan guaranty. , and 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,….

If the answer to any of the following Guidance questions is “yes”, then the BorrowerBorrowerPerson who is the obligor per the Note. , 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. , GuarantorGuarantorKey Principal or other Person executing a Payment Guaranty, Non-Recourse Guaranty, or any other Mortgage Loan guaranty. , or 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,… 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?
Did you consider any of the credit card or other unsecured debt balances?
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?