Fannie Mae Tightens Lending Standards for Investment Property Loans

This is important information to know if you are the kind of investor that uses conventional loans to finance their deals. Beginning on April 1 of this year, getting an investment property loan could become a lot harder to acquire.

This week, Fannie Mae sent lenders a letter stating that the government entity is tightening its standards for loaning money for investment backed loans and second home loans. And overall, they plan to cut back on purchasing these mortgages for the time being.

Do you intend to use a conventional loan to buy an investment property in the immediate future? You really need to know the following information.

What Are the Major Changes Taking Place with Fannie Mae?

On the horizon, you can expect Fannie Mae to implement two big changes in the near future. The first change is that Fannie Mae is not going to buy second home loans or investment loans as often in the near future. As a matter of fact, they said that these loans are only going to represent 7% of their overall portfolio, which is much less than the current state of things.

Fannie Mae

They also intend to focus on lenders with excessive delivery volume for these loan types, which will certainly lower the amount of conventional loans set aside for real estate investors.

Second, Fannie Mae has plans to constrict their underwriting standards for investment property loans and second home loans. This means that there are going to be fewer investment loans in the near future and because of the underwriting standard tightening it’s also going to be a lot more difficult to qualify for them.

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According to the new standards, investors must go through the Desktop Underwriter program from GSE. This system is designed to assess the eligibility and qualifications of potential buyers.

To qualify for an investment backed loan or second home loan, the investor must receive a recommendation of approved/eligible from this program. This is the only way to have a loan considered an official DU loan in an effort to qualify.

Fannie Mae has put plans in place to update its eligibility requirements and all of these changes will be reflected in the way they do things beginning next month on April 1.

At the current time, buying a one-unit investment property means putting down a down payment of 15% at a minimum and having a 620-credit score to use the DU program and qualify.

Looking at the Big Picture

These changes are taking place because the US treasury and Fannie Mae recently came to a new agreement. And this agreement requires Fannie Mae to follow new risk mitigation rules – Freddie Mac is also subject to the same new rules as well.

As mentioned, these policies take effect on April 1. From that point forward, loans that do not meet the new requirements will be rejected outright and will not become available for purchase for delivery to the pools of mortgage-backed securities.

To make things abundantly clear, when a loan doesn’t qualify for GSE purchase, the originating lender has no choice but to hold the loan, which makes it a much riskier proposition. Lenders are trying to avoid this at all costs, so it’s likely that mortgage companies will not be nearly as lenient with investors as they were in the past.

What to Do in This Situation

Personally, for the time being, it’s probably best to have cash on hand as an investor instead of borrowing money via conventional loans. If you have the cash, then you don’t have to worry about jumping through all these hoops to qualify.

On the other hand, conventional loans aren’t going to be wiped out of existence. It’s just going to be harder to get DU approval, so keep that in mind.