Filing Your Income Taxes
Freddie Mac is a federal program that helps lenders free up capital to lend money to new homebuyers. You may be eligible for a tax-exempt loan under this program if you’re buying a multifamily property that qualifies as low-income housing. 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. Freddie Mac is the catchy nickname for the "Federal Home Loan Mortgage Corporation." The government adds some stability to a shifting housing market.
Freddie Mac buys loans from mortgage lenders in bulk, then it combines them and sells them to investors. They’re sold as mortgage-backed securities. Lenders can then free up the money they need to issue more mortgages, which helps keep the housing market and the economy strong.
Read more: What Does It Mean if Freddie Mac Owns My Mortgage?
What Is a Tax-Exempt Loan?
The government offers tax exemptions in order to encourage certain behaviors. Municipal bonds can be exempt from taxes on interest earned, as can some loans issued by the federal government. The government allows certain loans to be exempted through Freddie Mac.
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. It provides financing with 4 percent Low-Income Housing Tax Credits, referred to as LIHTCs.
How Do the Tax Credits Work?
Qualifying investors can claim LIHTCs on an ongoing basis over a 10-year period after the housing project is made available to tenants. The tax credit works out to a percentage of the project's qualified basis. Congress has set this at no less than 9 percent since 2008, regardless of prevailing interest rates at the time. The credits are allocated to state governments who use them to facilitate opportunities for this type of housing according to qualifying rules.
Freddie Mac Tax-Exempt Loans
Purchasers of multifamily properties can apply for a Freddie Mac tax-exempt loan with fewer documents and less expense than they'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.
The loan term must typically have at least seven years left in the LIHTC compliance period to qualify. The property must also qualify as adequate for housing low-income tenants and it must be affordable enough for the lender to issue the loan on it. The maximum term depends on the type of loan you choose:
- 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 be as short as 36 months.
Advantages of Tax-Exempt Loans
There are some definite advantages to a Freddie Mac tax-exempt loan if you're buying multifamily affordable housing. You have multiple loan options, and 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 be aware of a few disadvantages of Freddie Mac tax-exempt loans. One is the extensive oversight that goes into it. The property must undergo an appraisal, which is common with all loans, but a Phase I Environmental Report is also required, as well as a physical needs assessment, a zoning report and a moisture management report. A Seismic Report may be required for properties in Seismic Zones 3 and 4.
There are also fees that are specific to a Freddie Mac tax-exempt loan. You have to pay application and commitment fees, among others, as well as a 2 percent lock fee that can be refunded later. Freddie Mac also charges a fee of $2,000 or 0.1 percent of the loan amount, whichever is higher. Lastly, you must prove you have reserves on hand to replace components of the building that wear out, and no supplemental loans are allowed.
You’re also limited on the amount you can borrow under a Freddie Mac tax-exempt loan: up to 85 percent of the adjusted value or 90 percent of the market value of the property you’re purchasing. The market value is based on the current value of fixed-rate Freddie Mac tax-exempt loans.
Read more: What Does a House Appraisal Consist Of?
Tax-Exempt Property Eligibility
The property you’re purchasing must qualify for the low-income housing tax credits. States decide how these tax credits are allocated, with each area deciding its own priorities. But LIHTC-qualifying properties must meet eligibility requirements for at least 30 years after the project has been completed. That means you must keep the rent restricted so the units remain 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 multi-property family homes. 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 must also meet requirements specific to LIHTC compliance. These can vary among jurisdictions but you’re typically given very specific limits regarding the tenants you can accept. There are also specific rent limits.
You may want to look into what you need to do to ensure your renters meet low-income occupancy requirements. Each renter must typically complete paperwork certifying their income, and you have to stay on top of ensuring that you know the income of every adult who's living in the house.
You can save on your purchase of a multifamily home with a Freddie Mac tax-exempt loan 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
- 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
- Freddie Mac: Tax-Exempt Loan Program Overview (ML-Deal)
- Tax Policy Center: What Is the Low-Income Housing Tax Credit and How Does It Work?
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.