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What Is a Freddie Mac Tax-Exempt Loan?

What Is a Freddie Mac Tax-Exempt Loan?
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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.

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.

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.

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.