A SARM is a variable interest rate loan that is convertible to a fixed-rate loan designed for the acquisition or refinance of multifamily properties. The interest rate adjusts periodically based on the benchmark SOFR index and are often interest-only for a portion of the term.

Fannie Mae’s Delegated Underwriting and Servicing (DUS®) model is driven by a business-first, future-forward approach. At the core of our business is the innovation and flexibility of our financing options both fixed and variable, which are designed to meet the unique and evolving needs of our lenders and their borrowers.

SARM offers flexibility with features like cap and floor rates that limit how much the rate can change, prepayment flexibility, and attractive conversion options to fixed-rate loans.

Our financing options offer our partners products, initiatives, and executions designed to adapt to different interest rate environments. Our unique DUS model provides lenders with the tools they need in any market condition with unmatched reliability, flexibility, and impact.

SARM offers competitive rates, fixed-rate equivalent financing, and flexible prepayment terms and features to suit borrowers in various circumstances across different market cycles. These include:

• 1% Prepayment Premium option after 1-year lockout.
• Declining Prepayment Premium option (4%, 3%, 2%, and 1% thereafter) after 1-year lockout.
• No Prepayment Premium during last three months of the loan term.
• Ability to convert to fixed-rate starting in year two.

• Existing, stabilized Conventional properties; Multifamily Affordable Housing properties; Seniors Housing properties; Student Housing properties; and Manufactured Housing Communities.
• Loans of $25 million or more.
• Mortgage loans secured by properties undergoing Moderate Rehabilitation may be eligible on a case-by-case basis.

Note: Credit enhancement mortgage loans and substantial rehabilitation are not eligible.

SARM loans have a conversion feature whereby the interest rate may be converted to a fixed-rate mortgage loan on any rate change date after the required lockout period (typically the first loan year) and before the start of the “open period” (typically the last day of the 4th month preceding the end of the mortgage loan term), provided the mortgage loan has not been delinquent during the previous 12 months and the borrower is not in default under any loan document.

• No prepayment premium charged at the time the SARM loan converts to a fixed-rate mortgage loan.
• Minimal re-underwriting; lender must determine that the current net cash flow can support the new fixed-rate mortgage loan terms. 

No increase in the loan amount; mortgage loan may be eligible for a supplemental mortgage loan.

After a required lockout period (typically, the first loan year), a SARM loan may be voluntarily prepaid. Lender selects the option of a declining prepayment premium or a 1% prepayment premium. No prepayment premium required during the "open period" (typically the last three months of the mortgage loan term).

SARM is a non-recourse execution with standard carve-outs for actions such as fraud and bankruptcy.

SARM loans are typically assumable, subject to review and approval of the new borrower’s financial capacity and experience.

• To protect borrowers from large interest rate increases, we require the purchase of an interest rate cap.
• SARM loans have no built-in periodic or lifetime caps. Instead, the borrower purchases an interest rate cap from an approved interest rate cap provider. The term of the initial interest rate cap must be at least five years.
• Cash reserves: If the mortgage loan term is longer than the interest rate cap term, the borrower must fund a cash reserve equal to at least 110% of the current replacement cap cost at loan closing for the purchase of the next interest rate cap.
• For structured transactions where the loan term is 7 or 10 years, the cap term will be on a 3-3-1 or 3-3-3-1 schedule, respectively. Replacement cap escrows cannot be held for longer than three years.
• Learn more about interest rate caps and approved providers.