Fannie Mae 120% Financing Clause

[Danny Day]

Has anyone ran into this issue with Fannie Mae? They have a clause in their contract which states you can not finance more than 120% total of the contract price of the property...

So on my last deal, I purchased for $65,000 and could only borrow $78,000 total. That left me about $6,000 for rehab cost, when I needed about $30,000.

How do you work around this?

Danny

[Ryan B.]

Closing on one today with the exact same issue. It is going go be a rental and not a flip. Paid $20,000, restriction will not allow me to finance more than $24,000 on it within 3 months. Bank is giving me $24,000 loan now, I will pay rest of repairs myself and then they will refinance me in 3 months and I will get all my money back.

[Don Hines]

Your gubmint at work. I bet you planned on hiring contractors and providing jobs with the $30 grand you need?
How do you like paying $150 for a used door lock?
Did you plan to sell it in 90 days? The finance restriction conveys with the property.

J Scott claims that every once and a while they forget to check the box that starts this BS. But, it is best to plan on the restrictions before you buy.
Don

[Danny Day]

This was on a deal back in March. I've got it leased right now, selling when ever my tenant wants to buy.. until then I'm cash flowing $675 per month. When he buys I'll make around $22k (not including my cashflow on rent).

I was asking this for my next deals going forward. I'm looking at 7 homes tomorrow to rehab / sell, but 2 are Fannie mae owned. They might get an X from my list before I even check it out...

Yes, I was going to provide jobs with that $30,000. Sad isn't it. The Gov lends to the banks, and puts restrctions on the banks to lend to the businesses.

Danny

[Nathan Emmert]

Alright... color me blonde... how do you convince a bank to lend you 120% of purchase price?? Are these small banks you have a relationship or simply normal course of business loans?

[Danny Day]

Thats total lending amount, so my hard money lender could only lend up to 120% of the contract price.

$65,000
x 1.20
---------
$78,000 total

$78,000 - $65,000 (purchase price) = $13,000 for rehab

Its the same as saying 20% over contract price.

Danny

[Nathan Emmert]

Ahhhh, you're using hard money... missed that part.

If it's hard money, couldn't he simply provided you an additional loan not secured by the property?

[Danny Day]

Thats a good question. I do not know the legalities of it all just yet. I assume if its a private loan you are not subject to this clause. I'm really not sure. Wish an RE attorney could chime in.

Danny

[Anson Young]

If this is the same clause I'm thinking about, its a RESALE clause/deed restriction? 3 months and no more than 120% of purchase price. I've never seen a loan clause in FNMA bank paperwork.

[Nathan Emmert]

Originally posted by Anson Young:

If this is the same clause I'm thinking about, its a RESALE clause/deed restriction? 3 months and no more than 120% of purchase price. I've never seen a loan clause in FNMA bank paperwork.

In theory, to Danny, they would be 1 and the same... if I know you can only sell the property for X * 120%... I wouldn't loan you more than 1.2X cause you wouldn't be able to pay me back without bringing money to the table...

[Anson Young]

Originally posted by Nathan Emmert:

Originally posted by Anson Young:

If this is the same clause I'm thinking about, its a RESALE clause/deed restriction? 3 months and no more than 120% of purchase price. I've never seen a loan clause in FNMA bank paperwork.

In theory, to Danny, they would be 1 and the same... if I know you can only sell the property for X * 120%... I wouldn't loan you more than 1.2X cause you wouldn't be able to pay me back without bringing money to the table...

It would depend on DOM and construction timeline I suppose at that point, but no hard money or private money lender I know would turn down a FNMA deal because of the deed restriction. Unless your plan is to sell it in next 30 days I guess?

But it wont restrict him from borrowing 120% of purchase, unless his lender isnt OK with a 90 day deed restriction....

Actually, thinking about it, just because you borrow 120% or more of purchase price, dosnt mean there is no equity. If you were borrowing 120% of ARV, that is what you are referencing. If he is borrowing purchase price plus rehab, no HML or private money lender would do the deal with no added equity on top of that. If you take ARV x 75% minus fixup as a purchase price (common flip formula), you have 25% equity built in to the deal.

[Chris Martin]

Originally posted by Danny Day:

Has anyone ran into this issue with Fannie Mae? They have a clause in their contract which states you can not finance more than 120% total of the contract price of the property...

So on my last deal, I purchased for $65,000 and could only borrow $78,000 total. That left me about $6,000 for rehab cost, when I needed about $30,000.

How do you work around this?

Danny

I don't buy it. Can you provide the link that says you can't borrow more than 120% of the contract price? Is this a deed restriction? I'm not a lawyer but a deed resriction isn't a deed of trust restriction. I can't imagine that they can enforce such a restriction... unless it is GSE money (via Fannie Mae loan, etc.), in which case they can do whatever they like.

[Ryan B.]

I just closed this afternoon on a house with these restrictions. $20,000 was purchase price. I have approximately $12,000 in rehab costs. ARV appraisal came back at $65,000. Small local bank that I do all my personal and business banking with was going to give me a construction loan for up to 85% of ARV.

I knew I could not resell for more than $24,000 (120% of purchase price) within 3 months so I had just skimmed over that part of the contract. Bank called me yesterday and had looked at contract closer and it also states "Grantee shall also be prohibited from encumbering subject property with a security interest in the principal amount greater than $24,000 for a period of 3 months from the date of this deed."

So bank went ahead and gave me a loan for $24,000 and I will have to provide the other money for the rehab. In three months, the bank is going to refinance me so i have all my money back. I will end up with a rental with nothing out of my pocket and about 50% equity.

[David Beard]

yes, it's resell or encumbrance. Here's the language:

"Grantee herein shall be prohibited from conveying captioned property to a bona-fide purchaser for value for a sales price of greater than 120% of the purchase price for a period of 3 months from the date of this deed.

Grantee shall also be prohibited from encumbering subject property with a security interest in the principal amount of greater than 120% of the purchase price for a period of 3 months from the date of this deed.

These restrictions shall run with the land and are not personal to grantee. This restriction shall terminate immediately upon conveyance at any foreclosure sale related to a mortgage or deed of trust."

Found this as a workaround:

"Set up an agreement with your rehab lender in which they agree to modify your loan once the 90 days expires. This will allow you to increase the loan amount since title insurance can be modified to reflect the higher loan amount after 90 days. Just keep in mind that you will incur additional closing and recording costs."

[Steve Babiak]

Originally posted by Anson Young:

If this is the same clause I'm thinking about, its a RESALE clause/deed restriction? 3 months and no more than 120% of purchase price. I've never seen a loan clause in FNMA bank paperwork.

From what I have heard, it has expanded the scope to include getting cash out in any type of a refi. I'm pretty sure there are already a few threads on BP where this has even been brought up previously.

[Chris Martin]

I'll eat my words. I bought one FNMA property in 2011 and I didn't look close enough. Yes, the wording includes "...encumbering subject property with a security interest in the principal amount of greater than $34,158..." just like David said.

This wording was not in a deed from Fannie Mae dated 3/11/2011, whereas my deed was 5/27/2011.

[Anson Young]

Originally posted by Chris Martin:

I'll eat my words. I bought one FNMA property in 2011 and I didn't look close enough. Yes, the wording includes "...encumbering subject property with a security interest in the principal amount of greater than $34,158..." just like David said.

This wording was not in a deed from Fannie Mae dated 3/11/2011, whereas my deed was 5/27/2011.

Me too I guess :-)

Last few FNMA I have done were wholesale LLC flips to other investors, certainly under the $120k rule so I havnt run into it lately!

Sorry guys!

[Mik Cohen]

If you absolutely want a work-around for the 90/120% FNMA REO Clause (#14 I think):
Use an LLC to purchase the FNMA home.
Then just sell the LLC - whenever you want to - in that 90 day period.

Using an LLC provides additional layers of protection and, perhaps most importantly, the property runs with the LLC, so that clause #14 is not compromised.

I highly recommend including a disclosure, for YOUR buyer to sign, that clearly outlines that the property may NOT be sold, out of that LLC, for the remaining period of the original 90 days/buyer cannot borrow more than 120% of the original purchase price from FNMA for the remainder of that 90 day period.

The LLC ? You can sell it for whatever value you and the buyer agree.
Your buyer will be able to sell it, out of that LLC, at the conclusion of that, original, 90 day period.

Now - the above info is my opinion.
I am not an attorney.
I recommend you consult a real estate attorney for the finer details before you make my solution yours ; )