Filing Your Income Taxes
Freddie Mac is a federal program that helps lenders free up capital to lend money to new homebuyers. If you’re buying a multifamily property that qualifies as low-income housing, you may be eligible for a tax-exempt loan under this program. A Freddie Mac tax-exempt loan is issued to certain low-income multifamily property owners.
What Is Freddie Mac?
Congress chartered Freddie Mac in 1970 to give lenders financial support to encourage homeownership. In doing so, the government adds some stability to the housing market. Freddie Mac is the catchy nickname for the Federal Home Loan Mortgage Corporation.
Freddie Mac buys loans from mortgage lenders in bulk, combines them and sells them to investors. They’re sold as mortgage-backed securities. In doing this, lenders can free up the money they need to issue more mortgages, which helps keep the housing market strong.
Read More: What Does It Mean if Freddie Mac Owns My Mortgage?
What Is a Tax-Exempt Loan?
The government occasionally offers tax exemptions in order to encourage certain behaviors. Municipal bonds may be exempt from interest, as can some loans issued by the federal government. In the case of housing, the government allows certain loans to be exempted through Freddie Mac.
In recent years, the government kicked off a Freddie Mac tax-exempt loan program designed to help multifamily property owners. This program applies specifically to those purchasing, refinancing or renovating an affordable housing property using 4 percent low-income housing tax credits.
Freddie Mac Tax-Exempt Loans
With a Freddie Mac tax-exempt loan, purchasers of multifamily properties can apply for a loan with fewer documents and less expense than you’d have using traditional bond credit enhancements. You get 4 percent in tax credits and multiple term options. These loans come with fixed, floating and float-to-fixed options, as well as interest-only loans.
In order to qualify for a tax-exempt loan, the loan term must typically be for at least seven years. The property will need to qualify as adequate for housing low-income tenants and be affordable enough for the lender to issue the loan on it. The maximum term depends on the type of loan you choose.
Here are the terms for the three types of loans.
- Fixed-rate loans can have terms of up to 30 years. Your interest rate is based on a spread to 10-year treasuries.
- Floating-rate loans are limited to 10 years. Interest rates are based on the 30-day Securities Industry and Financial Markets Association or the one-month London Interbank Offered Rate index.
- Construction loans can go as high as 36 months.
Advantages of Tax-Exempt Loans
If you’re buying multifamily affordable housing, there are some definite advantages to a Freddie Mac tax-exempt loan.
These advantages include:
- You cut out the hassle of bond issuing, which can also be risky.
- You have multiple loan options, including interest-only loans and fixed, floating and float-to-fixed rates.
- Some mixed-use properties can qualify.
- Subordinate financing is allowed.
There’s also room for you to take advantage of other Freddie Mac programs, such as gap financing, while also taking a tax-exempt loan. Lenders can also lock in your rate after a commitment, with early rate locks also available.
Disadvantages of Tax-Exempt Loans
Buyers of multifamily properties should also be aware of a few disadvantages of Freddie Mac tax-exempt loans. One is the extensive oversight that goes into it. The property needs to undergo an appraisal as well as a Phase I Environmental Report. Freddie Mac also requires a physical needs assessment, zoning and moisture management report. For properties in Seismic Zones 3 and 4, a Seismic Report may be required.
There are also fees specific to a Freddie Mac tax-exempt loan. You have to pay application and commitment fees, among others, and a 2 percent lock fee that will be refunded later. In addition to all that, Freddie Mac charges a fee of $2,000 or 0.1 percent of the loan amount, whichever is higher. Lastly, you need to prove you have reserves on hand to replace components of the building that wear out, and there are no supplemental loans allowed.
You’re also limited on the amount you can borrow under a Freddie Mac tax-exempt loan. You can borrow up to 85 percent of the adjusted value or 90 percent of the market value on the property you’re purchasing. The market value is based on the current value of fixed-rate Freddie Mac tax-exempt loans.
Read More: Why Do Mortgage Lenders Want to See Bank Statements?
Tax-Exempt Property Eligibility
In order to qualify for this loan, the property you’re purchasing needs to qualify for low-income housing tax credits (LIHTC). States decide how these tax credits are allocated, with each area deciding its own priorities. But LIHTC-qualified properties must meet eligibility requirements for at least 30 years after the project has been completed. That means if you claim LIHTC status, you’ll need to keep the rent restricted so that the units are affordable to low-income renters.
A wide range of property types can be eligible for Freddie Mac tax-exempt loans, including garden-style as well as mid- and high-rise multiproperty families. They must have had 90 percent occupancy for 90 days or more prior to applying for the loan.
Read More: Can You Buy Multifamily Housing With an FHA Loan?
Ensuring LIHTC Compliance
In addition to the Freddie Mac tax-exempt loan requirements, you also have to meet requirements specific to LIHTC compliance. These vary from one jurisdiction to the next, but typically you’re given very specific limits on the tenants you can accept. There are also specific rent limits.
If you’ve never owned low-income housing, you may want to look into what you need to do to ensure your renters meet low-income occupancy requirements. Each renter typically needs to complete paperwork certifying their income, and you have to stay on top of ensuring that you know the income of every adult living in the house. Understanding this extra work from the start helps you ensure you’re prepared.
With a Freddie Mac tax-exempt loan, you can save on your purchase of a multifamily home. As long as you meet the requirements, it’s a great way to save a little money on the loan you’re taking for a new rental property.
- FreddieMac.com: Frequently Asked Questions
- Investopedia: Freddie Mac - Federal Home Loan Mortgage Corp – FHLMC – Definition
- Ice Miller: Fundamentals of Tax-Exempt Financing for 501(c)(3) Organizations
- Multifamily.loans: Freddie Mac Tax-Exempt Loans
- Novoco.com: About the LIHTC
- NYC.gov: Tax Credit and HOME Compliance
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Stephanie Faris has written about finance for entrepreneurs and marketing firms since 2013. She spent nearly a year as a ghostwriter for a credit card processing service and has ghostwritten about finance for numerous marketing firms and entrepreneurs. Her work has appeared on The Motley Fool, MoneyGeek, Ecommerce Insiders, GoBankingRates, and ThriveBy30.