Agency loan or bank loan for a small apartment building

The difference that drives everything: amortization and the balloon

The headline rates are often close. The proceeds are not, because the two lenders run the same coverage test over different payment schedules. Freddie Mac Conventional Small allows 30-year amortization. A bank sets its own schedule, and on a small building it is commonly shorter, with the loan maturing years before the schedule ends. In the 2025 HMDA data on apartment loans, 75.2% carried a balloon payment³.

A longer schedule means a lower annual payment on the same loan, and since coverage equals NOI divided by the payment, a longer schedule supports a larger loan at the same coverage.

A 24-unit refinance under each lender’s rules

Illustration. A 24-unit building appraises at $4,400,000 with $300,000 of underwritten NOI. Assume an agency quote of 6.10% on a 10-year fixed term with 30-year amortization, and a bank quote of 6.40% on a 5-year fixed term with 25-year amortization and a 75% LTV policy. Both test coverage at 1.25x.

Sizing (illustration)	Agency small loan	Bank loan
LTV limit	80% = $3,520,000	75% = $3,300,000
Coverage limit at 1.25x	about $3,300,000	about $2,990,000
Loan offered	about $3,300,000	about $2,990,000
Personal guarantee	No (bad-act carve-outs only)	Yes

The agency loan is about $310,000 larger, and none of that comes from the rate. It comes from five extra years of amortization.

Now hold the loan amount equal at $2,990,000 to see what each costs to carry.

Same $2,990,000 loan (illustration)	Agency, 6.10%, 30-year	Bank, 6.40%, 25-year
Annual payment	about $217,400	about $240,000
Balance after 5 years	about $2,785,700	about $2,704,100
What happens in year 5	Nothing; the fixed rate runs 5 more years	The loan matures and must be renewed or refinanced
Payment if the bank renews at 7.00% over the remaining 20 years	n/a	about $251,600

The bank borrower pays about $22,600 a year more and builds about $81,600 more equity by year five. That faster paydown is real value, not a cost. The risk is the year-five balloon: the borrower refinances at whatever rate and coverage test exist then, and a guarantor is on the hook if the numbers no longer work.

Where each one wins

The agency loan wins on a stabilized building you will keep. It locks the rate for a long term, adds no guarantee to your personal balance sheet, and sizes on a longer schedule. Fannie Mae small loans cover up to $9 million nationwide, and Freddie Mac Conventional Small covers generally $2 million to $10 million.

The bank loan wins when any of these is true:

• The building is not stabilized. Fannie’s DUS term sheet sets the bar: Stabilized occupancy, typically 90% for 90 days before funding⁵. A bank can lend into a lease-up with a covenant.
• The loan is small. HMDA shows the typical small-building loan is modest: $725,000 median loan on 5-24 unit properties³. Below Freddie’s floor and at the bottom of Fannie’s range, a local bank often gives the better total cost.
• The commercial share is large. A ground-floor retail space or office suite that produces a big part of the income can push a building outside agency guidelines.
• The hold is short. A bank step-down or open clause costs far less than agency yield maintenance on an early sale.
• You want one relationship. Banks reward the operating accounts and deposits.

The costs people miss

On the agency side

• Yield maintenance. Fannie Mae fixed-rate loans default to it, and Freddie’s structure: Yield maintenance until securitization, 2-year lockout, then defeasance; open final 90 days. An early sale after rates fall can cost a large share of the balance.
• Rate lock deposits. Fannie Mae’s standard rate lock asks for one: 2% deposit for locks up to 90 days; 3% for 91 to 180 days⁶.
• Replacement reserves and tax and insurance escrows collected monthly, which a bank may waive at low leverage.
• Third-party reports. Fannie streamlines them on small loans: Streamlined inspection and environmental screening (ASTM E-1528-14) instead of full reports⁴. You still pay for an appraisal and the lender’s legal.

On the bank side

• The guarantee is a contingent liability on your personal financial statement. The next lender counts it.
• The deposit ask. Moving operating accounts has a real cost if you earn more elsewhere.
• Renewal risk. A bank near its concentration screens may decline to renew. The supervisory screen: Total CRE at 300% or more of total capital, with 50% or more growth over 36 months⁷. The 100% and 300% thresholds are supervisory screens, not caps on CRE lending⁷, but a bank above it gets closer examiner attention.
• Annual reporting covenants, often including a global coverage test across everything the guarantor owns.

A quick test before you apply

1. Is occupancy stable and above the agency threshold, with no major work planned? If no, start with a bank or a bridge lender.
2. Is the loan at least Freddie’s floor? If no, your agency option is Fannie Mae alone.
3. Will you hold through the fixed term? If no, price the bank’s step-down against agency yield maintenance at your likely sale date.
4. Is a personal guarantee acceptable to every owner? If no, the agency loan is the default.

Send the rent roll, trailing twelve months and your hold plan through the form, and we will quote the agency and bank routes side by side.