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Posted 09/09/2008


Fannie Mae’s Last Act : New Loan Fees And Maximum Property Restrictions For Real Estate Investors

For owners of investment properties, the mortgage market is getting ugly.

In its last act as a semi-private company, Fannie Mae updated its lending guidelines Friday, this time slapping new restrictions and additional fees on income-producing properties.

The most impactful change is Fannie Mae's new, 4-property limitation.

Based on the new rules, second home and investment property applications will be denied in underwriting if the mortgage applicant has, or will have, more than 4 properties financed in total.

The former guidelines allowed for 10.

However, Fannie Mae has also clarified what it means to "own" a property, creating a loophole for real estate investors. Fannie Mae no longer considers a property "under ownership" if the property is held in the name of a corporation -- even if the borrower is the sole owner of the corporation.

Real estate investors, therefore, can place their properties into an LLC and not be subject to Fannie Mae's 4-property limit.  Most real estate investors do this already for liability and taxation reasons, but now it's a good idea for mortgage approval reasons, too.

The other change from Fannie Mae does not have a work-around.  It's a set of new, mandatory loan fees, specifically assigned to investment property mortgages.

  • Loan-to-value less than 75 percent : 1.75% loan fee
  • Loan-to-value 75.01-80.00 percent : 3.00% loan fee
  • Loan-to-value 80.01-90.00 percent : 3.75% loan fee

These new charges are separate from, and in addition to, Fannie Mae's already-costly loan-level adjustments.  Add the two together to calculate the total "mortgage fee".

How to calculate your loan-level pricing adjustment

And, lastly, there's the Fannie Mae changes for "Accidental Investors" -- mortgage applicants that couldn't sell their primary residence and, therefore, converted it to a rental.

Fannie Mae's new guidelines restrict owners of converted property from using its rental income on a subsequent mortgage application.  If the converted property's equity is less than 30 percent of the home's value, the entire monthly housing payment must be shown as a monthly income loss.

If the equity exceeds the 30 percent threshold, owners can use 75 percent of the rental income to qualify, and must also show 6 months worth of housing payments in reserves for both the rental property and the upcoming home purchase in order to qualify.

Now, long-term, it's unclear whether the government's Fannie/Freddie takeover will lead to a reversal in the mortgage guideline tightening we've seen this year, but it's sure done a good job in bringing mortgage down.

But as owners of investment properties are finding out, low rates only matter if you can qualify for them.

The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.

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Mortgage loan limits for every U.S. county, as published by Fannie Mae & Freddie Mac, the Federal Housing Administration (FHA), and the Department of Veterans Affairs (VA)