Fannie & Freddie Investor Guidelines
Whether you’re new to real estate investing or a seasoned investor in Gainesville, FL, many people turn to conventional mortgages to get started. Once they begin the process and are approved, the names Fannie Mae and Freddie Mac are heard more than once. The Gainesville Realtors with Rabell Realty Group help investors navigate the mortgage process and decide whether Fannie Mae or Freddie Mac is right for buying an investment property.
Who Fannie Mae & Freddie Mac Are
Fannie Mae dates back to 1938 when it was created by Congress to “help ensure a reliable and affordable supply of mortgage funds throughout the country.” Freddie Mac came about in 1970 as a private company but with the same goal as Fannie Mae. Today both are shareholder-owned companies.
A common misconception about is they make loans when in fact they buy loans which meet their guidelines. Once purchased from lenders, the mortgages are either held in Fannie Mae or Freddie Mac’s portfolios or packaged into mortgage-backed securities that are sold to other investors. This helps expand the amount of money available for mortgages and helps lower interest rates to mortgage borrowers.
Most property investors receive a conventional mortgage to purchase one to four unit properties. These loans are also called conforming loans as they are required to conform with guidelines established by Fannie Mae and Freddie Mac. Both require investors to have several months of mortgage payments saved to cover any months the property is unoccupied. They also limit number of properties owned with a mortgage on them.
Terms To Know
Terms to know and understand for both Fannie Mae and Freddie Mac include:
- Loan-To-value (LTV) Ratio: The amount of the mortgage divided by the property’s appraised value. The lower the LTV, the lower the risk to the lender of a potential default.
- Debt-To-Income (DTI) Ratio: The amount of a borrower’s total monthly debt payment(s) divided by their gross monthly income. It’s one way lenders measure a potential borrower’s ability to manage a monthly payment and repay debt.
- Combined Loan-To-Value (CLTV) Ratio: Used by Fannie Mae, this is determined by adding all outstanding loan balances and dividing the total by the property’s current market value.
- Fixed-Rate Mortgage (FRM), Fully Amortizing: The interest rate applied to the outstanding loan balance doesn’t change throughout the life of the loan. The monthly mortgage payment will be the same every month until the loan is paid in full.
- Home Equity Combined Loan-To-Value (HCLTV) Ratio: This ratio combines the sum of the original mortgage, the home equity line-of-credit, and the unpaid balance of all other subordinate financing and divides it by the lower of the property’s sale price or appraised value. Subordinate financing is any financing with a priority lower than the original mortgage.
- Adjustable-Rate Mortgage (ARM), Fully Amortizing: The interest rate applied to the outstanding loan balance varies throughout the life of the loan. Fully amortizing means the payment amount will change as the interest rate changes.
- Total Loan-To-Value (TLTV) Ratio: This is simply Freddie Mac’s name for a CLTV.
Following the housing collapse in 2008 and 2009, Freddie Mac and Fannie Mae adjusted their eligibility requirements for borrowers, including real estate investors. As the real estate market has rebounded since then, some requirements have loosened again but the following are considered general eligibility requirements.
Freddie Mac and Fannie Mae accept credit scores as low as 620 but charge lower level price adjustments (LLPA) for investment properties, including single unit and multi-unit homes. These adjustments raise the price for a riskier loan and accordingly raise the mortgage rate. There are only a handful of ways to get around the LLPA, such as having a credit score over 740 with a large down payment and no subordinate financing.
Most investment property-eligible loans will accept a maximum debt-to-income (DTI) ratio of 43 percent. If you have distinct compensating factors such as high credit and/or large cash reserves, you may be approved with a DTI of up to 50 percent. However, blemishes on your credit score or a lack of cash reserves can reduce a maximum DTI accepted to well below 43 percent.
Minimum Reserve Requirements
Also called cash reserve requirements, this guideline gives Fannie Mae and Freddie Mac some assurance you’ll be able to make the monthly loan payment if a property is unoccupied for a length of time. The requirement itself depends on:
- The transaction;
- Occupancy status and amortization type of the property;
- Number of units in the property; and
- Number of other financed properties currently owned.
A specific reserve amount is determined by the number of months of the qualifying payment amount for the mortgage you could pay using you financial assets. The amount must be a liquid reserve, such as:
- Checking or savings account;
- Investments in stocks, bonds, mutual funds, money market funds, trust accounts, and certificates of deposit;
- Vested amount in a retirement savings account; or
- Cash value of a vested life insurance policy.
Number Of Loans
An investor is limited to the number of loans they can have for properties by both entities, though the limits are different. Freddie Mac holds you to have financing on six properties at one time, but Fannie Mae allows up to 10 financed properties.
However, Fannie Mae has strict criteria for investors with five to 10 properties. For financing, you must:
- Own between five and 10 residential properties with financing in place for each;
- Have a 25 percent down payment to purchase a one-unit property, 30 percent for a two- to four-unit property;
- Minimum credit score of 720;
- No late mortgage payments within the previous 12 months;
- No bankruptcies or foreclosures in the previous seven years;
- Two years of tax returns showing rental income from all rental properties; and
- Six months of principal, interest, taxes and insurance (PITI) reserves for each of the financed properties.
Income & Asset Documents
As with most loans, you’ll need to provide numerous documents proving your income and assets during the application process. Examples of the documents you’ll be asked to submit include:
- Thirty days of pay stubs;
- Sixty days of bank statements with all pages included;
- Two years of tax returns;
- Two years of W-2 forms;
- Two years of 1099 forms; and
- Social Security, retirement, and/or pension award letters.
Loan Size Limits
Depending on the number of units in a property, Freddie Mac and Fannie Mae limit the size of a loan they’ll purchase. Factors used include whether the property is in a standard area or a high-cost area in the contiguous United States or Puerto Rico. We’ll use one-unit properties as examples, but the loan size limits adjust for up to a four-unit property.
For an area to be high-cost, 115 percent of the local median home value exceeds $453,100, or the limit for a one-unit property in a standard area. So, the limit of a one-unit property in a high-cost area increases to $679,650. But keep in mind not all states have high-cost areas and there are different loan size limits for Alaska, Hawaii, Guam, and the U.S. Virgin Islands.
Though some Fannie Mae and Freddie Mac-eligible loans only need three percent of the purchase price as a down payment, it’s recommended to have at least 20 percent down to avoid private mortgage insurance.
Tips on Investing Within Your Budget
Whatever budget you have for investment properties, an investment property real estate agent with Rabell Realty Group has a few tips to help you get started.
Buy Your Own Home
The best investment you could make is owning your own home. Not only would you be building your own equity, it could provide insight into future investment properties. Taking out a mortgage for your home would let you see and understand how the application and approval process generally goes.
Find A Partner
Even the most seasoned property investor will tell you teaming up is the way to go, especially when starting out. Perhaps you have the finances locked up but don’t have the experience. Leverage and complement the skills and/or experience you have with someone else’s.
Consider Turnkey Rentals
Turnkey rentals are properties that have already been renovated and have tenants. Most turnkeys require a smaller down payment and a reasonable credit score, but would give you landlord/management experience often asked for in a Fannie Mae or Freddie Mac loan application.
What you know – or don’t know – can make or break your investments at any stage. The more you can educate yourself about real estate investing before buying your first property, the better off you’ll be, and likely have a better investment to start with.
Rabell Realty Group Helps Real Estate Investors
There is a lot to keep in mind when investing in real estate and while many people find successful investments on their own, the professionals at Rabell Realty Group are here to help! We have years of experience as Gainesville Realtors, including investing in our local market. Let us use this insight to give you a helping hand with your investment goals.