Mortgage

New rule means increased charges for funding house mortgages and second properties

Investment property mortgages are now even more expensive

Fannie Mae makes it harder and more expensive to get an investment property or a vacation home mortgage. And it's likely that Freddie Mac will follow suit soon.

The changes, which Fannie outlined in a letter to lenders on March 10, will not affect mortgages that have already been agreed and blocked.

Others planning to buy a second home with an appropriate mortgage are likely to have higher costs and potentially more stringent requirements.

The new rules start on April 1st. However, the lenders are already reacting. Here's what you should know:

Check your investment property mortgage eligibility today (March 16, 2021).

What has changed for second home and investment property mortgages?

These changes were triggered by a new regulation by the Federal Office for Housing Financing. The FHFA regulates Fannie Mae and Freddie Mac and sets a stricter cap on the number of second home and investment mortgages they can buy.

Traditionally, the percentage of Fannie and Freddie loans granted for second homes was somewhere in their middle teens. But the FHFA cut that down to 7% – almost half the usual number.

Many lenders rely on selling their mortgages to Fannie or Freddie soon after they close. However, now they can't be sure they can sell investment property and second home loans. Because Fannie and Freddie are not allowed to buy them once they hit that 7% cap.

Higher closing costs for borrowers

The new rule creates additional risk for lenders as they could be left with loans that no one wants to buy. And as expected, lenders are quickly shifting this risk to borrowers in the form of higher borrowing costs.

How much higher? Well, Mortgage News Daily reports that Penny Mac, a company that has provided many second home and investment property compliant loans, has already done so A fee of 2.25% of the loan amount has been added for all non-primary residence applications – even with a deposit of 25% or more.

For less than 25% there is an additional cost of 5%.

That said, if you want to borrow $ 300,000 for a vacation home or investment property and you have a 20% down payment, you could pay an additional $ 15,000 or higher rate to offset the fee (see next section).

Could a higher mortgage rate replace higher closing costs?

Some lenders may let borrowers pay these fees through a higher mortgage rate instead of paying them up front when closing. You did it last year when the FHFA received an “aDverse Market Refinance Fee "for most compliant refinancing loans.

Of course, a higher interest rate is likely to cost more than paying these fees upfront in the long run because that way you will be paying interest on the entire loan amount for that long. But many borrowers would likely prefer to have to bring in an additional $ 15,000 or more upon completion.

Will it be harder to qualify for investment home mortgages?

The new FHFA rule alone does not directly affect lenders' underwriting criteria for investment property. There was no formal change in the requirements for:

Credit Scores Debt-to-Income Ratios (DTIs) cash reserves

However, investment property and second home borrowers may want to save a larger down payment as the fees and / or interest rates on loans with a decline of less than 20% to 25% are likely to be much higher.

And since many lenders will be forced to limit the number of second home and investment property mortgages they can create, the new rules may encourage them to be more selective with the borrowers they want to work with.

So it wouldn't be a big surprise if the lending rules on these mortgages got a little stricter.

Check your investment property mortgage eligibility today (March 16, 2021).

Can you avoid the new fees?

Not all traditional loans are “Compliant” – which means some don't need to meet Fannie Mae and Freddie Mac's requirements. You may be able to find a lender to work with you on a different type of vacation or investment home mortgage.

In fact, this is the point of lenders' efforts to increase fees and interest rates: pushing consumers to non-fannie and non-Freddie options.

Some lenders may create their own programs to meet a large demand in the market and may even offer excellent interest rates.

The bad news is that if Fannie and Freddie cut the volume and new lenders came in, there could be a significant void.

Equally important, Fannie and Freddie's offerings of investment property mortgages are popular. You are safe and predictable. The rules are nationally compliant.

However, this compliance could lead to fragmentation as individual banks and lenders start creating their own programs. This is already the case for the jumbo mortgage market.

And as with jumbo mortgages, you may need to have very high levels of credit and significant assets to qualify for an investment property or second home. Without the help of Fannie and Freddie, lending usually gets tighter.

And investment property mortgages have always been more expensive than condominiums. This change could widen the void as the Fannie / Freddie interest rate environment is a tide raising all boats.

This means that future investment property and second home buyers should expect higher interest rates even if they are in great financial shape.

So the window of opportunity for finding a bargain on your investment property mortgage may be closing.

As fees – and possibly prices – rise, prepare for the lowest possible cost by increasing your credit score, paying off debts, and saving a sizeable down payment. With the new rule, the strength of your application will matter more than ever.

Check your new plan (March 16, 2021)

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