Last Friday, when Fannie adjusted the allowance for the amount of financed properties owned from 4 to 10, other underwriting requirements on investment and second home borrowers were updated as well. (Freddie Mac still has the 4 financed property limit).
Reserve requirements vary depending on the number of financed properties owned (including primary residence):
1-4 financed properties 0wned:
- 2 months of reserves on the subject property if it’s a second home.
- 6 months reserves on subj. property if it’s an investment property plus 2 months reserves on each other second home or investment property.
5-10 financed properties owned:
- 2 months of reserves on the subject property if it’s a second home.
- 6 months of reserves on the subject property if it’s an investment property plus 6 months reserves on each other financed second home or investment property.
Note: Freddie Mac’s guidelines are *currently* 6 months PITI.
Other underwriting changes for investment properties include:
- 70% LTV for purchase of 1-unit and 70% for 2-4 units.
- 720 minimum low-mid credit score.
- No history bankruptcy or foreclosure in the past 7 years.
- Rental income must be documented with two years tax returns.
- Borrowers required to sign form 4506 (which you can expect on ALL loans these days–including owner occupied).
Don’t forget that there is a significant price hit of 0.75% to fee from Fannie and Freddie with investment properties on top of the credit score/loan to value adds (LLPA). Seller contribution is limited to 2% of the sales price with investment property.
Rhonda – did you see today’s headline from National Mortgage News?
Daily Briefing for February 12, 2009
PMI Cuts Brokers Loose
In what could be another nail in the coffin of the loan brokerage industry, The PMI Group of San Francisco confirmed it will no longer insure any mortgages brought to them by third-party originators unless these firms have a warehouse line of credit.
I realize your affiliation with Mortgage Master as a mortgage banker with a line of credit won’t be impacted by this guideline change. But, what’s your feeling on this and how do you think it will impact the market in general and your business in particular. Just looking for your reaction. Thanks,
Anne Keller
Financial Service Project Manager and Education Professional
Keller Consulting Services
Hi Anne,
During the bubble run up and the predatory lending days, many brokers avoided private mortgage insurance and instead opted for 80/20 loans
I’d like to know more of what’s behind PMI’s decision to cut out brokers.
Perhaps they are seeing higher defaults and loan losses on third party originations.
PMI has always been the most conservative.
Anne, I think this is horrible. I was away at a conference today and recieved your message as well as others. I’ll write a post soon about this.
I’m afraid that other private mortgage insurance companies will follow…and this will be the offical death of mortgage brokers.
Pingback: PMI Mortgage Insurance Company drop kicks Mortgage Brokers | Rain City Guide
Jillayne, 80/20 mortgages were not exclusive to mortgage brokers. In fact, ALL OF THE BANKS we work with offered them too. A mortgage broker would have a difficult time providing an 80/20 mortgage without the assistance of a mortgage bank.
I would not classify all 80/20’s as predatory. How about the Fannie Mae Flex 100?
If it’s a LTV issue with PMI, they could have just limited it to 90% for mortgage brokers.
PMI is being very quiet about why they’ve done this.
I don’t think a borrower is permitted any gift to buy an investment property. If I am not correct, can you correct me please; I need an urgent answer. Thank you for writing informatively.
Khawajaseed, what does your loan originator say?
I too am interested in why the Feds would not allow gifts on investment property. Seems odd. Money is money. Why do they care?
Can you get around it?
Liz, it’s not that simple. Banks/lenders want to make sure that investors have enough skin in the game. Investment properties have higher odds of becoming foreclosure and thus, it takes more to qualify.
Thanks for your response. I am putting 35% down, the proceeds from the sale of one second home to purchase a new second home. Due to all the crazy new banking regulations, my longtime lender of over 30 years, is 50,000 short of what I need for the purchase. No secondary financing is allowed either. I have been offered the money as a gift. So how do I accomplish this with the “no gift” ruling?
BTW my credit score is 820 and I have very little other debt. They would have lent it to me two years ago.
Liz, yes they probably would have lent it to you about two years ago…as you can see, underwriting conditions are very tight and continuing to get tighter.
Is the home you’re buying a second home or investment? Your first comment, you refer to it as an investment property; the last comment you call it a second home. Both have different guidelines.
You could consider putting only 20% down if it’s an investment property…25% down will give you slightly better pricing.
Liz, another consideration could be to try working with a non-conventional lender. Fannie/Freddie will not allow gifts w/investment property.
Well it is kind of both which is confusing. Because I am using a 1031, my bank considers it an investment. I am putting 35% down. I mostly use it as a second home but have rent it at times, too.
I still dont get the logic of the no gift. THe bank is in essence only funding about half of the appraised value of the home.
I am considering selling personal effects to obtain the 50,000 gift. Will that work?
Liz, I’m starting a new comment thread…the boxes keep getting smaller w/each reply and my eyes are too old to mess with that. 😉
“I am considering selling personal effects to obtain the 50,000 gift. Will that work?”
First of all, I cannot answer what your lender will or will not ultimately accept.
If you are selling personal items, it is not considered a gift. However, you will need to be able to prove/document the following:
1) that you owned the items that are being sold.
2) true value of the items being sold by an independent source (such as an appraisal)…just because the buyer is willing to pay a certain amount for an item, doesn’t mean the u/w will accept it.
3) documentation showing the transfer of the sale of the item (like a bill of sale).
4) paper trail showing the receipt of the funds which could include copy of the buyers check, deposit slip, etc.
Even if you meet the above criteria, the underwriter/lender may still say no to selling private items to raise funds for your down payment/closing costs. They are not obligated to provide you a mortgage. REVIEW THIS WITH YOUR MORTGAGE PROFESSIONAL AND HAVE THEM RUN IT BY THEIR UNDERWRITERS FIRST!!!
Thanks again. I appreciate all the help.
So basically, am I understanding correctly that the lender could decided how sticky to get as far as the paper trail or even if they will accept it at all. Geez!. Could they make it more difficult? Not like I dont have a long history with this bank and an over the top credit score to boot. Also would the third house I have bought and paid off through them.
I am still baffled by the “why?” of no gift allowed. Especially since The bank is only loaning half of the actual appraised value of the property. Am I missing something here?
You had also mentioned “non traditional lenders”. Who would that necessarily be? Once again, I do thank you for all the help.
Liz, it’s not so much your bank as it is Fannie Mae and/or Freddie Mac. Have you gone to your bank? Maybe they would make an exception for you because of your long history with them… “non-tradtional” means alternative financing (which your bank may have).
If the bank is currently only financing half of the sales price, then increase your loan amount so that you don’t need the gift.
The reason for not allowing gift is because they want to make sure YOU have all the skin in the game. As I mentioned above, you might be able to sell personal property–check with your bank first–this is not a gift.
Seller contributions are also reduced on investment property as compared to owner occupied…boils down to that “skin in the game” again.
Good luck!
So the bank does have some discretion concerning the ability to accept a gift or the sale of personal property? If I am understanding you correctly, that is good to know.
Everything seems so different now due to all the bad loans the banks have made in the past. It is tough that good customers like myself are suffering because of it.
The lender was so negative from the very beginning, citing the current climate, I am not going to shake the tree while it is finally in motion.
Also because of new restrictions they are not willing to lend me more than half.
One way or another I will make this work. I’m big on gut in some dealings like these. (Naturally after doing your homework and due diligence.) This move feels right and an excellent time to buy up in this particular area.
Thanks so much again for your help.
Liz, some banks may “portfolio” loans some don’t and have to sell them. You’ll need your elbow grease. I don’t know of any bank who will do gift money on an investment property.
I think we are going to try to do the jewlery sale and a possible later amount to help with other expenses related to the sale of the two houses like insurance costs, inspections, realtor commission etc. It may or may not work, but I will give it a shot. Hopefully with my history with the bank they will allow it if it doesnt appear like an out-right gift.
I have been working with another lender simultaneously, they said as long as the money was in the bank for two months I would be all right. So maybe that will work too. It is such a small amount of the sale price, 14%, I am keeping my fingers crossed it is doable.
If you have any other ideas, let me know . Thanks again for all your help.
Liz, good luck. Be sure to check in with your who ever will be providing your financing on what they will requires with regards to the sale of your personal items. What I mentioned above is only a guide and there is no guarantee any lender will accept it.
Charles:
I don’t think you can technically buy a house you own. This sounds like a cash out refinance, at 50% LTV, with only one borrower (you), where you take the cash out and give it to your sister. Or, perhaps it is still in your parents name?
If it is in you and your sister’s name, you have to quit claim your sister off of title, and refinance in your name only. In WA state that would involve paying an excise tax, and some fees to a title company for the quit claim. Your sister would have to sign a few papers acknowledging the refinance.
If you and your sister are not on title, there are different issues.
Another answer (I’m borrowing Rhonda’s favorite phrase) is you should consult a local mortgage professional (get a second opinion), who is familiar with the rules in your area! Credit unions also sell their loans to Fannie/Freddie, so I don’t see how that would differ.
Selling the house to someone else does seem silly, especially since you seem to still want the house.
The other twist to this scenario is if this is owner occupied or investment.
There could be even more twists…, which is why the “consult a local mortgage professional” adage makes sense.
I think it’s sorta funny that the BOA LO recommends checking out a credit union, rather than a wholesale lender, that has access to a wide variety of lenders and different guidelines.
And if this BOA LO is really a “mortgage teller” (a LO who is inexperienced as a mortgage professional warming a desk at one of the many BOA locations)… they may not be very qualified to help with a more less than cookie cutter transaction.
Go to a local mortgage professional–someone with experience and who has access to a live local underwriter–is your best bet.
Hi, I see it has been a while since a post has been made on this link, but I wanted to know if what I desire to do is possible. Similar to Liz’s situation, I want to buy a home, but because it is 15 min away from a home I own and am still paying on I was denied as an owner occupant. I then agreed to purchase as an investment property, even though I will be moving into it and renting out my current home. I was then told I needed another $6000 dollars. I see that gifting is not allowed for the downpayment, but my wife and I are about to have a baby. If someone, especially are parents were to give us money to help with the baby cost and we chose to use it for the downpayment, would that be allowed?
Lastly, we got married last May, if someone were to give us a late wedding gift, would that be allowed?
Thank you
John, if you’re going to rent out your current home and occupy the new home – you shouldn’t have a problem obtaining owner occupied financing unless the new home doesn’t seem to fit what an underwriter might view as a home you would live in (between the two homes). For example, is the new home smaller than the one you already own? You may need to find another lender to see if their underwriter will view this differently.
If the financing on your existing home is not FHA, you might try going that route with the new home – that will also allow you to use gifts.
How much are you planning on putting down for the new home?
Sorry for starting a new thread but I didn’t not see a way for me to reply to your direct message. Also, thank you
for the prompt reply, that was amazing.
I am already renting out my current home. I rent out 3 of the 4 bedrooms and will rent the forth one out when I move. Renting out the 3 alone pays more than the mortgage. The bank was not satisfied with that for reason that you mentioned. The home I am in again is 4bd 3ba the home I want to move into is a 3bd 2.5ba. However, though it is smaller it is much more room for me, who is living in one room. I don’t want to kick out the renters for obvious reasons. In additon, I bought the home 5 years ago as a single man, and now I am married about to have a child, so we need to move out, and the new area is better for a family too. I have explained all this to the lender and am still awaiting an answer, but was told I have to buy the home as an investor still.
I plan on putting 20% down, because I am being forced to by the home as an investor as mentioned. I have 9,000+ and need up to $3,000 for the total downpayment, and I assume another $3000 for closing cost and unforseen expenses. I have money in stocks and retirments up to $8000 but apprently that’s not enough though.
One more question, If I were to be saving money at home for an emergency one that would prevent the banks from opening or us from reaching them and/or money to go back to school in a safe, what do you believe an underwriter/lender would feel about that?
Last question for real this time 🙂 Would you happen to have lenders you could suggest in the event a get a no-go on Monday morning?
Thank you
Hi John, I think you need to find a new lender. Find one who is in your local area to run your scenario by. It’s hard for me to make recommendations when I don’t know what area you’re in (and I may not know lenders in your area).
Can you document you’ve been renting out the home? Do you have copies of cancelled checks from the renters? Did you claim the rental income on your tax returns? Do you have rental agreements? Everything today is about being able to back up (document) your financial scenario.
Underwriters are probably having a hard time because the home is smaller. Do you own other property?
Also, you’ll be hard pressed to find lenders who will accept cash that is not “seasoned” in a bank for down payment or closing cost.