Fannie Mae multifamily soft costs are specific expense categories that the agency allows borrowers to include in their loan-to-cost (LTC) calculation for new construction and major rehabilitation projects. These eligible soft costs, which include items like architectural fees, legal costs, construction interest reserves, and developer fees, can increase your effective LTC from roughly 65% (hard costs only) to as high as 75-80% of total project cost. Understanding exactly which soft costs qualify, and how to document them properly for your DUS lender, is the single most effective way to maximize leverage on a Fannie Mae multifamily deal in 2026.
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What Are Soft Costs in a Fannie Mae Multifamily Deal?
Soft costs are the non-construction expenses required to plan, finance, and complete a multifamily development or major rehabilitation project. Unlike hard costs (the physical materials and labor to build the structure), soft costs cover professional services, regulatory compliance, financing charges, and carrying costs incurred during the construction period.
For Fannie Mae multifamily loans underwritten through the Delegated Underwriting and Servicing (DUS) program, soft costs play a critical role in determining total project cost and, by extension, the maximum loan amount. When a borrower can document and include more eligible soft costs, the total project cost increases, which raises the dollar amount available under the same LTC percentage.
This distinction matters because many borrowers leave money on the table by failing to include all eligible soft cost categories in their initial budget submission. A well-prepared soft cost budget can mean the difference between a $12 million loan and a $14 million loan on the same project.
Which Soft Costs Does Fannie Mae Allow in the LTC Calculation?
Fannie Mae publishes detailed guidance on eligible soft costs through its Multifamily Selling and Servicing Guide and supplemental lender memos. The list below covers the primary categories that DUS lenders accept when calculating LTC for new construction and substantial rehabilitation projects.
Architectural and engineering fees represent one of the largest soft cost categories, typically running 3-5% of total project cost depending on project complexity and local market rates. These include schematic design, design development, construction documents, and construction administration services.
Legal fees encompass costs for zoning approvals, land use entitlements, construction contract review, loan document preparation, and closing. While legal costs vary by jurisdiction, most multifamily projects allocate 1-2% of total project cost for legal services.
Environmental reports, including Phase I and (when triggered) Phase II assessments, are mandatory for all Fannie Mae multifamily loans. The cost is relatively modest at 0.2-0.5% of total project cost, but failing to include them in the budget means those dollars fall outside the LTC calculation.
Construction interest reserves deserve special attention because they can represent a significant portion of soft costs. Fannie Mae allows borrowers to include the estimated interest expense during the construction period as an eligible soft cost, which effectively increases the project cost basis and supports a higher loan amount.
How Do You Maximize LTC Using Eligible Soft Costs?
Maximizing your LTC ratio through soft cost inclusion requires a systematic approach that begins well before you submit your loan application. The most successful borrowers treat their soft cost budget as a strategic document rather than an afterthought.
The first principle is completeness. Review every eligible category and ensure your budget includes a line item for each one, even if the amount is modest. A $15,000 survey fee or a $8,000 environmental report might seem insignificant on a $20 million project, but collectively these smaller items can add hundreds of thousands of dollars to your cost basis.
The second principle is documentation. DUS lenders will not credit soft costs that lack adequate backup. This means executed contracts (not proposals), certified reports (not draft versions), and actual invoices or receipts where costs have already been incurred. Preparing documentation in advance dramatically accelerates the underwriting process.
The third principle is realistic budgeting. While you want to capture every eligible dollar, inflating soft cost estimates will backfire during underwriting. DUS lenders compare your budget against industry benchmarks and their own experience. Overstated line items trigger additional scrutiny and can delay your loan by weeks.
For borrowers looking to understand how LTC ratios compare across different loan products, our guide on multifamily commercial loan LTV ratios for 2025-2026 provides additional context on agency lending benchmarks.
What Are the Fannie Mae Soft Cost Caps and Limits?
Fannie Mae does not impose a single blanket cap on total soft costs as a percentage of project cost. Instead, the agency sets limits on specific categories and relies on DUS lender judgment to evaluate overall reasonableness.
The most significant cap applies to the developer fee. Fannie Mae generally limits the developer fee to approximately 10% of total project cost, though the exact percentage can vary based on deal structure, market, and lender. The developer fee must reflect actual services rendered and cannot simply be a mechanism to inflate the cost basis.
Contingency reserves are typically accepted at 3-5% of total project cost for new construction and up to 10% for substantial rehabilitation projects, where unforeseen conditions are more likely. Going above these ranges requires strong justification and lender approval.
Construction interest reserves must be calculated based on a reasonable draw schedule and current market interest rates. DUS lenders typically model this using their own assumptions and will not accept borrower estimates that assume unrealistically slow draw schedules (which would inflate the interest reserve).
For other soft cost categories, there are no hard percentage caps, but DUS lenders benchmark each line item against comparable projects. If your architectural fees are 7% of total project cost when the typical range is 3-5%, expect questions and potential adjustments.
If you are evaluating whether a permanent loan or a refinance structure works better for your project timeline, it is worth understanding how soft cost treatment differs between construction-period and stabilized financing.
How Does Fannie Mae Compare to Freddie Mac on Soft Cost Eligibility?
Borrowers frequently evaluate both Fannie Mae (DUS) and Freddie Mac (Optigo) for multifamily construction and rehabilitation financing. While the two agencies share many similarities in soft cost treatment, several differences can affect your decision.
Both agencies allow a comprehensive list of soft costs in their LTC calculations, including professional fees, carrying costs, permits, and contingency reserves. The overlap is substantial, and for most standard multifamily projects, the eligible cost categories are nearly identical.
The primary differences emerge in developer fee caps, contingency treatment, and lender-specific overlays. Freddie Mac Optigo lenders may apply slightly different developer fee caps (often 8-10% depending on the program) and may have different documentation requirements for certain cost categories.
LTC ranges also differ slightly. Fannie Mae DUS lenders commonly underwrite to 75-80% LTC on well-structured deals, while Freddie Mac programs may range from 70-80% depending on the specific product and market conditions. The actual LTC achieved depends heavily on how thoroughly soft costs are documented and presented.
One area where Freddie Mac may offer an advantage is in certain affordable housing programs, where additional soft costs related to tax credit compliance and resident services may be eligible. Conversely, Fannie Mae DUS lenders often have more flexibility in their delegated authority, which can mean faster execution on soft cost approvals.
For a broader view of how LTC benchmarks are trending across all major loan products, see our 2026 commercial real estate loan LTV benchmarks analysis.
What Documentation Do DUS Lenders Require for Soft Cost Approval?
DUS lender documentation requirements for soft costs are rigorous and specific. Understanding what your lender needs before you start assembling your package will save significant time and reduce the risk of underwriting delays.
The construction budget is the foundation document. It must itemize every hard and soft cost in a format consistent with Fannie Mae categories. Most DUS lenders provide a standard budget template; using it exactly as designed prevents formatting-related delays.
For professional services (architecture, engineering, legal), DUS lenders require executed contracts that show scope of work, fee structure, and payment schedule. Proposals and estimates are not sufficient. If the contract has been partially performed, include invoices showing amounts already paid.
Third-party reports (appraisal, market study, environmental, survey) must be addressed to the lender and meet Fannie Mae standards for content and provider qualifications. A Phase I environmental report prepared for a different lender or a prior transaction may need to be updated or re-addressed.
The developer fee requires its own supporting documentation, typically a development agreement or management contract that outlines the specific services the developer is providing in exchange for the fee. DUS lenders scrutinize this closely to ensure the fee is not simply an equity extraction mechanism.
Construction interest reserves are calculated by the DUS lender based on the draw schedule, loan amount, and prevailing interest rates. While the borrower provides the draw schedule, the lender performs an independent calculation.
Using a commercial mortgage calculator can help you model different scenarios before you approach your DUS lender with a formal soft cost budget.
What Are the Most Common Mistakes Borrowers Make with Soft Costs?
After reviewing hundreds of multifamily construction loan packages, several recurring mistakes consistently reduce borrower leverage or delay closings. Avoiding these pitfalls is straightforward once you know what to watch for.
The most frequent mistake is submitting an incomplete budget. Borrowers often omit smaller soft cost categories like survey fees, title insurance, or municipal impact fees because they seem insignificant. On a $25 million project, even 0.5% in overlooked soft costs represents $125,000 that could have been included in the LTC calculation.
The second common error is poor documentation timing. Submitting a loan application with "to be provided" placeholders for soft cost backup documents signals to the DUS lender that the borrower is not fully prepared. This can push your deal to the back of the queue while better-documented packages move forward.
Overstating the developer fee is another frequent issue. Some borrowers attempt to include a developer fee above Fannie Mae caps, which triggers additional review and often results in a downward adjustment. It is far better to structure the fee within published guidelines from the outset.
Failing to account for construction timeline extensions can also hurt borrowers. If your construction period runs longer than planned, the original interest reserve and carrying cost estimates may be insufficient. Building a reasonable buffer into these projections demonstrates sophistication and avoids mid-construction budget shortfalls.
Finally, some borrowers use a budget format that does not align with Fannie Mae categories. When DUS underwriters have to re-map your line items to their standard format, it creates opportunities for eligible costs to be miscategorized or overlooked entirely.
For borrowers considering vertical construction projects, the soft cost considerations become even more important as these ground-up developments carry the highest proportion of eligible soft costs relative to total project cost.
How Should You Structure Your Soft Cost Budget for Maximum Approval?
Structuring your soft cost budget for DUS lender approval is as much about presentation as it is about content. A well-organized budget communicates competence and reduces friction during underwriting.
Start by using the DUS lender's preferred budget template. If they do not provide one, organize your budget into the standard Fannie Mae categories: Land Acquisition, Hard Construction Costs, Professional Fees, Regulatory and Compliance Costs, Financing Costs, Carrying Costs, Marketing and Lease-Up, Developer Fee, and Contingency.
Within each category, provide a brief description of each line item, the estimated cost, the basis for the estimate (contract, proposal, or market benchmark), and the status of supporting documentation. This level of detail gives the underwriter confidence that you have thoroughly analyzed each cost component.
Include a summary page that shows total hard costs, total soft costs, and the soft cost percentage of total project cost. If your soft costs fall within the 15-20% range that DUS lenders typically expect, this summary reinforces that your budget is reasonable. If soft costs exceed 20%, be prepared to explain which specific categories are driving the higher percentage.
Present supporting documents in an organized appendix that mirrors the budget line items. When the underwriter can quickly locate the executed contract or certified report that supports each soft cost, the review process moves faster.
Finally, consider engaging a third-party cost consultant to review your budget before submission. DUS lenders often require their own cost review, but having an independent validation in advance demonstrates diligence and can preempt underwriting objections.
If you are weighing your options for multifamily financing and want expert guidance on structuring your soft cost budget, contact our team for a complimentary consultation. Our specialists work with DUS lenders daily and can help you capture every eligible dollar in your LTC calculation.
What Is the Timeline for Soft Cost Review and Approval?
The soft cost review process is embedded within the broader DUS underwriting timeline, but understanding the specific milestones helps borrowers plan and avoid delays.
Initial budget review typically occurs within the first two weeks of formal application. The DUS lender evaluates each soft cost line item for eligibility, reasonableness, and documentation adequacy. Any deficiencies are communicated through a due diligence request list.
Borrowers typically receive 30 days to cure documentation deficiencies, though DUS lenders strongly prefer receiving complete packages upfront. Each round of back-and-forth adds 2-3 weeks to the underwriting timeline.
Third-party cost review, if required, adds another 2-4 weeks. The cost consultant independently evaluates the construction budget (both hard and soft costs) and provides a report to the DUS lender. Significant discrepancies between the borrower's budget and the cost review can trigger additional negotiations.
Final soft cost approval is incorporated into the overall loan commitment, which typically takes 60-90 days from application for well-prepared packages. Borrowers who submit complete documentation upfront and respond quickly to underwriter questions can often compress this timeline to 45-60 days.
Ready to move forward with your Fannie Mae multifamily project? Reach out to our lending team to discuss your specific soft cost budget and get a preliminary LTC estimate.
Frequently Asked Questions
Can you include land acquisition costs in Fannie Mae LTC calculations?
Yes, land acquisition costs are included in the total project cost for Fannie Mae multifamily LTC calculations. The land value is typically based on the lesser of the purchase price or the appraised value at the time of acquisition. If the land was purchased more than 12 months before the loan application, the DUS lender may use the current appraised value instead of the original purchase price.
What happens if my actual soft costs exceed the original budget estimates?
If actual soft costs exceed the approved budget during construction, the additional costs generally cannot be added to the loan amount after commitment. The borrower is responsible for funding any cost overruns from equity. This is why building a reasonable contingency reserve (3-5% for new construction) into your initial budget is critical. Some DUS lenders may consider a loan modification for material changes, but this is not guaranteed and adds time and expense.
Are soft costs treated differently for substantial rehabilitation versus new construction?
Yes, there are notable differences. Substantial rehabilitation projects typically qualify for higher contingency reserves (up to 10% versus 3-5% for new construction) because unforeseen conditions are more common when working with existing structures. The eligible soft cost categories remain largely the same, but DUS lenders may apply different benchmarks when evaluating the reasonableness of specific line items. Rehabilitation projects may also include costs for temporary tenant relocation, which are not applicable to new construction.
How does the developer fee work for projects with related-party developers?
When the developer is related to the borrower (which is common in multifamily development), DUS lenders scrutinize the developer fee more closely. The fee must still fall within Fannie Mae caps (approximately 10% of total project cost) and must be supported by a development agreement that details the specific services provided. Related-party developer fees cannot simply be a mechanism to return equity to the borrower. The lender will evaluate whether the fee is consistent with what an unrelated, third-party developer would charge for comparable services in the same market.
Can you use soft cost documentation from a previous lender or loan application?
Some documents may be reusable, but most require updating or re-addressing. Phase I environmental reports are typically valid for 180 days and must be addressed to the current lender. Appraisals must meet current Fannie Mae standards and be addressed to the DUS lender. Executed contracts for professional services can often be carried over if the scope and fees have not changed. Survey and title documents may need to be updated to reflect current conditions. Your DUS lender will specify which existing documents they can accept and which need to be refreshed.
Maximizing your Fannie Mae multifamily LTC through proper soft cost inclusion is one of the most impactful strategies available to multifamily developers and investors. Every eligible dollar you document and include in your project cost basis translates directly into additional leverage. If you need help structuring your soft cost budget or identifying the right DUS lender for your project, schedule a call with our team today.