More Fannie Changes for Investment Properties and Second Homes

Effective tomorrow (August 1, 2008) borrowers who convert their existing residence to an investment property or second home will be treated to tougher standards if they’re using a Fannie Mae loan.    Here are the new requirements:

Converting existing residence to a “second home”.

  • Borrower must qualify for both payments (this is not new).
  • Unless the borrower has at least 30% equity in the existing property, they will need 6 months PITI for both properties in reserves

Converting existing residence to “investment property”

  • The borrower may only use rental income (75% credit) of their existing property if they have at least 30% equity in the property.   Otherwise, they must qualify with both full payments (no credit for rent).
  • Rental income must be documented with a fully executed lease agreement and a receipt showing the security deposit from the tenant has been deposited into the borrowers account.
  • If the borrower does not have 30% equity in the proposed investment property (former residence) then they will need 6 months PITI for reserves for both properties.

Either an appraisal, AVM or Broker Price Opinion is used to determine if there is 30% equity in the existing home that is being converted to a second home or investment property (this may be determined by underwriting).  

Last, be careful when reading guideline changes, such as this.  Underwriting guidelines and loan programs are changing constantly, post like this are quickly “dated material” and no longer applicable–do verify information you find on the internet with your Mortgage Professional to make sure the information is still valid.

Financing an Investment Property

EDITORS NOTE:  Rates on this post are from 2008!  Mortgage rates for investment properties are much lower now! Contact your local licensed mortgage originator for a current rate quote.

Obtaining a mortgage for a non-owner occupied propery is much different than buying one you will reside in.  For starters, qualifying is tougher and mortgage interest rates are higher as it’s a riskier transaction for the lender.   Here are some quick tips to help get you started if you’re considering buying an investment property.

Plan on using at least 20% for your down payment plus closing costs.   With a 25 or 30% down payment, you will receive a slightly better interest rate.   Just to give you an idea, here is a sample of some current rates based on a single family dwelling with a sales price of $450,000 for a 30 year fixed mortgage and a minimum 720 credit score:

Owner Occupied with minimum 20% down:  5.75% priced with 1% origination/discount point (APR 5.904%)

Non-Owner Occupied (NOO) with 20% down: 6.375% with 1% point (APR 6.537%)

NOO with 25% down: 6.250% with 1% point (APR 6.413%)

NOO with 30% down: 6.125% with 1% point (APR 6.289%)

Of course, you can always pay more in points to have a lower rate.   This is just to provide you with an apples to apples comparison.

There are two camps for qualifying for an investment property:  those who are proven at managing rentals and those who are buying a rental for the first time or who have less than 2 years history.  If you have less than a 2 year history, then it’s likely that you will not be able to use rent credit from the proposed purchase.  Lenders allow 75%  of the rent to be used for qualifying purposes.   Proving you’re a financially successful landlord to the underwriter will take your last two year’s complete tax returns including the Schedule E’s.   If you can qualify for the full PITI payment on the investment property along with your current PITI payment on your residence, then the underwriter may only require a regular appraisal.  Otherwise, count on the appraisal costing almost twice as much as a typical appraisal for conventional financing.   Fannie and Freddie also require a minimum of 6 months reserves (cash assets after closing) for NOO borrowers.

Odds and Ends

  • FHA can be a great way for first time buyers to get into the investor market when they’re buying a 2-4 unit home.  The buyer must occupy in one of the units and the mortgage will be treated as an “owner occupied” transaction.   You will have upfront and monthly mortgage insurance and can buy with as little as 3% down payment.
  • Second homes are sometimes treated as investment properties.  This is really up to the underwriter.  Typically if the home is located within 50 miles of the borrowers residence or if it does not make sense as a second or vacation home, the underwriter may determine that it’s an investment which means tougher underwriting and the NOO rate.
  • Fannie Mae programs exist that help family members buy properties that don’t meet the second home requirements without treating it as an investment purchase (Family Opportunity Mortgage).

As always, I highly recommend that you meet with your local Mortgage Professional as soon as possible if you’re even just considering obtain a mortgage for any reason (investment property, residencial purchase or refi, vacation home, etc.).


Too Close to Home

Ardell’s recent blog, Agent FIRED! Lender Fraud, reminded me of one of my first transactions almost seven years ago. I can’t remember how I came across this client or how he was referred to me because I have deleted him from my database. I don’t ever want to provide a mortgage for him or anyone he’s associated with.

This person had contacted me wanting a mortgage for a home just a few doors down from his current residence. He had told me it was for his family members and that it should not receive a non-owner occupied rate. I informed him that currently, there are no special rates and programs for family members (it would be great if…but there’s not) and therefore, the loan is considered a non-owner occupied. He, of course, really wanted the lower rate that an owner occupied home would feature. A week or so later into the transaction, he asked me “What if I move out of my home and into the new home. My family can move into my home.