Credit Score

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.

Debt-to-Income Ratios

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.

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.

Educate Yourself

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.