Dumb question... Trying to size agency loans on multifamily underwriting. Say you're sizing to 1.30X coverage ratio, 5 year term, 5 year I/O. Do you size to the I/O debt pmt, or the amortizing debt pmt? Does this change if the debt is a 10 year term, 5 years I/O? Do you use T3/T12 NOI or year 1 proforma NOI? Obviously really impacts proceeds. 


Purchase Price - $36,000,000

NOI - $2,000,000

Debt - $22,000,000, fixed at 6%, 5 year term, 5 years I/O

I/O Pmt - $1,342,000 (1.49X DSCR)

Amortizing Debt Service Pmt - $1,600,000 (1.25X DSCR)

Comments (12)

chuckduck, what's your opinion? Comment below:

Been underwriting with this same type of debt, and they have been sizing based on the amortizing loan to a 1.3/1.25x dscr. This definitely cuts down proceeds in comparison to sizing with I/O payments. Also been using T3/T12 Revenue/OpEx. Also replacing the T12 Insurance and taxes with proforma insurance and taxes.

  • 2
owl22, what's your opinion? Comment below:

Thanks for the info. Have you been underwriting 30 or 35 year amort? I've heard you can push to 35 if you quality based on mission driven financing.

chuckduck, what's your opinion? Comment below:

30 yr, I've think if you a high percentage of affordable units they'll also push a 35yr amort, haven't been able to get this though.

Backoffice_Boss, what's your opinion? Comment below:

Comments are right but this could change again because the agency just loosened their DSCR reqs to help out deal flow  

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  • Associate 2 in RE - Comm

Agency lender here:

Some of your questions have already been answered, but...

  • Always size based on amort DSCR 
  • Term & IO don't have a direct impact on sizing - however, there are some general rules of thumb that need to be considered
    • 5-yr loans used to cap out at a 1.30x vs 1.25x on a 7/10/12/15. That's different today as the agencies are adjusting to borrower's appetite for shorter duration
    • Full-Term IO typically caps you out at 1.30x - 1.35x (although there have been ways to get full-term IO at 1.20x or 1.25x). 
    • Proceeds will differ slightly between term durations, but that's due to the rate stack (5-yr UST on a 5-yr, 10-yr UST on a 10-yr, etc.) & not credit parameters (DSCR & LTV)
  • Every deal is a bit different, but the general rule of thumb when it comes to underwriting is:
    • T3 Net Rental Income (unless there's a material downward trend or you're coming out of lease-up concessions)
    • Y1 Taxes (Appraisal)
    • Y1 Insurance (actual policy)
    • T12 Other Income & RUBS
    • Greater of T12/Budget/Appraisal for all other expenses (able to underwrite some controllable expenses to a lower budgeted figure with comp support from new ownership's portfolio)
blu-j, what's your opinion? Comment below:

I would add that FTIO can absolutely be done with a 1.25x cover if the sponsor is big enough. I've never had trouble with FTIO unless the LTV is for whatever reason greater than 65% but that's not happening these days due to coverage constraints.

A small sponsor would likely be unable to get FTIO at 1.25x coverage.

OP: Fannie and Freddie size and price their loans based on tiers (Freddie calls them buckets). You should be able to Google these to get a high level overview of them but the most aggressive (Tier 2) is 1.25x and 75% LTV.

  • Associate 3 in RE - Comm

Minor point, there is a difference with getting FTIO from Fannie vs Freddie. Easier to get from Fannie on some loans whether its big or small sponsors and this is a result of the differences in business models. Borrowers may not always know this, there is a difference between Fannie and Freddie business models. With Fannie, there is this concept of delegated loans. Meaning lenders are allowed to underwrite FTIO (amongst other things) as long as it checks some boxes (market, exit rate, LTV, etc this criteria is a super confidential contract between Fannie and the lenders and the criteria varies between lenders, obviously the more productive lenders get better/more lenient criteria). With Fannie, the lender holds onto a portion of risk when they underwrite loans. As a result of this risk sharing agreement, Fannie allows the lenders to do things like FTIO without requiring Fannie's approval as long as it checks some boxes. In theory, on some loans, lenders can quote and even app a deal without Fannie signing off on it. With Freddie, there is 0% risk for lenders, hence every loan is re-underwritten and lenders cannot quote anything without Freddie's signoff. This is why there is sometimes full term I/O with Fannie loans (it's not that Fannie signed of on it but as explained previously, lenders can quote that on their own without Fannie's sign off) but not with Freddie loans, they usually quote half term I/O for 1.25x loans and FTIO for only 1.35x loans. 

compoundingshekel, what's your opinion? Comment below:

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