Fannie Mae Announces Deed for Lease Program

In a press release this morning, Fannie Mae announced a new program for homeowners who are facing foreclosure and who do not qualify for a loan modification:  Deed for Lease.  Distressed homeowners would complete a deed in lieu of foreclosure back to the lender anad then rent their home from the lender at market rate.   Leases may be up to 12 months followed with a month to month option.  

Jay Ryan, Vice President of Fannie Mae says:

“This new program helps eliminate some of the uncertainty of foreclosure, keeps families and tenants in their homes during a transitional period, and helps to stabilize neighborhoods and communities.” 

  For homeowners to qualify for the Deed for Lease Program:

  • The home must be occupied as a primary residence.  Investment properties may be eligibile as long as there is a tenant occupying the propert and willing to participate in the Deed for Lease Program.  
  • This program is not available for second homes or vacation homes.
  • Available for 1-4 unit properties where Fannie Mae owns the mortgage (not available for government guaranteed or insured loans: FHA, HUD, VA, USDA).
  • Second mortgages/liens on the property are not allowed;
  • Borrower/tenant must be able to document that the new lease payment does not exceed 31% of their gross monthly income.
  • At least three mortgage payments must have been made since the last origination/loan modification.
  • Borrower may not be more than 12 months past due on the mortgage.
  • Borrower/tenant may not be actively involved in a bankruptcy.
  • Rental insurance may be required if there are pets.  (You probably want rental insurance regardless).
  • Borrower/tenant will need to pay a lease application fee of $75 fee per unit.

I’m wondering if this will be considered a taxable sale — will there be excise tax due?   A title insurance policy will be required to prove the title is “marketable”.    The properties will be inspected to make sure the occupants have kept the home in good condition and to permit the marketing of the property for sale.  I would hope that the Deed for Lease tennant would have the first right to re-purchase their home during the 12 month period.   According to Fannie Mae’s announcement: 

“A Deed for Lease property that is subsequently sold includes an assignment of the lease to the buyer.”  

Homeowners will need to work directly with their mortgage servicer (who they make their mortgage payment to) in order to see if they qualify.  According to Fannie Mae, mortgage servicers can offer this program immediately–however, you can bet it may take a while for this program to become available.   Fannie Mae offers these instructions for homeowners who are considering this program.

I’m wondering if there is excise tax due on the sale of the property to the lender.

The intent of the program, which I applaud, is: 

“to minimize family displacement, deterioration of neighborhoods caused by vandalism and theft to vacant homes, and the effect these have on families, communities and home price stabilization”.  

I’m sure we all have abanoned homes in our neighborhoods and know families who have lost their homes.   Hopefully this will help make things a little better for all while our housing industry and our economy is trying to recover.

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.).


How difficult is it to find a good rental in Seattle?

I have a few “Google alerts” set up to be notified when certain terms are published on the web, such as Rhonda Porter, Mortgage Porter and West Seattle.   Tonight, the West Seattle Google alert pointed me to someone who is looking to rent a 2 bedroom home with “a soul” for up to $2800.  

We are moving to Seattle very soon. Need online resources to find a nice rental home for the two of us. We are looking in the Ballard, Queen Anne, and West Seattle areas. I’d prefer non-mega corporate rentals, ie. one or two unit townhomes, a house, or a smallish apartment building. I’m familiar with craigslist, which I’ve been using a lot. Also familiar with NWapartments. The larger sites like list rentals that are just too cookie cutter and commercial for us. Please give resources to help us find a nice, unique, home with a soul. BTW, we are looking at the $1800-$2800/month rent range for a 2bedroom.

Are rents that high?  Do rental homes really lack soul?  I rented my two bedroom in West Hill Auburn on Northlake a short time for $1800 per month a couple years ago that had “the soul” of worn out shoes.   I loved that funky house.   However, it was not a “good rental” for many reasons (1/3 acre garden, septic tank, etc), I clung onto it for personal reasons and have since sold it. 

I’m just full of questions after reading this!  🙂  Guess you could call it soul searching.

Affordable Condos or Cheap Apartments — Who's choice is it?

I’m not typically one to go on about property owner’s rights vs government(s) ability to control code enforcement and reasonable use of property without infringing on others.  I think active involvement in zoning, environmental protection, etc are way too important for market forces only. But when the politicians start butting in without thinking about the unintended consequences it’s time to speak up.

For the last couple years we’ve all heard a lot of complaints about the shortage of affordable home ownership in and around Seattle. At the same time, it’s been a dismal market for landlords as the rental market has been very low. Given that situation, wouldn’t you do what a lot of apartment owners are doing — go condo. Better return for the owner and it increases the supply of available equity housing in the market.

From an article in the Seattle Times, Condo Wave leaves renters battered, apparently State Senator Ken Jacobson believes those evil property owners shouldn’t be allowed to put their real estate to it’s highest best use. Apparently we must stand up for low-rents, tenant rights over landlords and above all no more development. Let potential homeowners look farther away from the city to live — they can afford it. Ok, I’m exaggerating and ranting – but figure out the obvious. They’re not eliminating housing — just switching it to the ownership market.

If you live in Washington State, please be sure to check out the Seattle Times article and contact Senator Jacobson with your opinion on his proposed legislation. A hearing is scheduled for Thursday in the Senate Consumer Protection and Housing committee, so don’t wait.