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Investment Mortgage Changes: Fannie Mae Shakes Up the Rules

Beginning April 1, Fannie Mae, made a big change in the investment lending world. The governement entity put out a letter that made a significant change to its operations.

“Recent amendments to our senior preferred stock purchase agreement with Treasury impose additional risk criteria on the loans we acquire,” the GSE said in a letter. “One of those restrictions is a 7% limit on our acquisition of single-family mortgage loans secured by second home and investment properties.”

So what exactly does this mean? First, lets look at what Fannie Mae does. Fannie Mae is a government entity create to ensure a healthy supply of funds for the housing market. Lenders, banks or other institutions that issue mortgages on homes sell their loans to Fannie Mae which in turn packages them with other loans and sells them off as mortgage-backed securities. You may have noticed shortly after closing on your personal home, or an investment home, that a new company begins servicing your loan soon after. This is a sign your loan was sold to another entity - possibly Fannie Mae or Freddie Mac.

Why the change? In the past two years, second-home mortgages and investment property loans and greatly increased. Fannie Mae is making the change to decrease the risk of loans within their portfolio. Although rental properties that are well maintained should not create a burden on the housing market, the Covid-19 pandemic create a scare and concern. The concern being vacancy rates would sky-rocket due to a lack of employment which in turn could create a mass amount of foreclosures (i.e. the crash of 2008/2009). But... it's not really happening.

The bigger question - what does this mean for investors buying investment properties with conventional financing?

Truth is, if it's a good deal with your numbers, it's still a good deal! What I mean by that is if you run your numbers and proforma for a property, with a quoted rate, and it works for your personal investment strategy, then BUY IT! Sure. The rates are going to be higher. Lenders have increased the rates as a way to slow the amount of loans they're doing since they can't easily re-sell them if Fannie Mae reached the threshold. Yes, there may be additional fees. Be sure to ask your lender if there are additional fees being charged (points, closing costs, etc). As a way to offset expenses, many lenders have turned to increasing or charging new fees at closing up to 5%. Be sure to ask about all fees. But in the end, if it's a good deal, it's a good deal.

After speaking to a few different lenders in the marketplace, those that usually work with investors that buy and hold rental properties, many think the increased rates and fees will slowly go away. The news of the change from Fannie Mae broke pretty quickly and in turn lenders acted quick because of the unknown; imposing fees and increasing rates. In the next 3-6 months, we shall see if things cool a bit once the full comprehension of the change is understood.

For now, as always, run your numbers. Do your due diligence. If the property is a fit for your portfolio, buy it! In comparison to the historical average, rates are ridiculously low and the need for housing is high.

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