Does Seller Financing Count Against Fannie's Limit?

Question

I've browsed through the forums and wasn't able to find anything on this, but I'm sure other people have this same question.  I own 6 properties all financed with conventional 30 year mortgages.  I'm considering adding a seller financed property to my portfolio, but I would also like to max out the 10 Fannie Mae backed mortgages as well.

I know that if you buy a property using seller financing it doesn't show up on your credit score, but the rental income will show up on your tax returns.  When I apply for a mortgage, the bank looks at the last two tax returns of mine, and they also want to know how many properties and mortgages I have.  Even if the private mortgage isn't showing up on my credit score, what would I tell the bank regarding the seller financed property?  Here is the issue as I understand it:

1. Fannie Mae / Freddie Mac count the total number of mortgaged properties against your 10 property limit, not just Fannie/Freddie backed loans.

2. I am not at the 10 property limit yet, and would like to have 10 cheap, low interest mortgages on my books before taking on higher interest debt.

3. I don't see how I can add a private mortgage to my portfolio and not have it count against my limit, thus reducing the number of Fannie/Freddie loans I can get by one.

4. Should I just wait until I hit the 10 property limit before pursuing any seller financed deal?

Have any mortgage brokers out there run into this?

Thanks,

Erik

Joel Owens · Answer

Hi Erik,

Since commercial loans were talked about some I thought I would chime in.

Typically as Chris Simmons stated banks quote what I call the "crap,crap refi bomb loans"

Meaning 5 year term with 20 year amort. and your first born on the guarantee. These are horrible loans and I counsel my clients against them heavily unless you are doing a value add type project with a fast turn around.

5 years does not give you much time to pay down the principal to offset refi shock if you do not want to sell. The benefit to local banks is they will do small balance loans of 500k to 1 million where other lenders will not give you the time of day. In my world a 500k commercial loan is typically mom and pop type stuff and looked at like a 50,000 house loan would be. I have talked with many VP's at the banks. It simply comes down to they see in 2,3, 4 years that interest rates will rise. The bank knows they will have to offer higher interest rate payouts than 1 percent to drive deposits to checking and savings accounts and CD's. If they have long term fixed rate on what they consider larger commercial loans then their margins on profit will go down and they could go out of business.

The longest I have seen with some regional banks is 7 to 10 year fixed rate term. These loans are harder to find and in many cases you only get these when you have considerable assets and deposits already with a local bank. At that point you can push back on rate and terms and the bank will lose all your business if they don't think about making an exception. I have seen this happen with some other investor friends I know who have net worth in the millions. The local bank didn't want to lose them so bent over backwards on the loan. The bank will be crafty and put in a loan provision that the checking and savings has to maintain a certain balance  or the loan defaults to the fallback rate.

In commercial the better loans with insurance and private sources who will hang out 10,15,20 year term are in the 2 million and up range. You can usually get non-recourse and fixed rate debt. As net worth grows this is extremely important because a partnership of say 4 people might be okay putting in 200k each and losing the 200k if it goes south on a 3.5 million purchase but do not want to be on the hook with all their other assets.

Matt Devincenzo · Answer

@Erik Trefzger I think you've gotten your answer to whether this will count toward your total Fannie/Freddie limit or not. So my question back to you is what is the benefit of getting the seller financing for you? Lower down payment, unfinanceable condition, high DTI, low reserves...?

What I'm getting at is there may be another reason to go with the SF route right now other than to get over the 10 loan limit. If that is the case there is a way that this could still be beneficial longer term.

Let's say that you can get this property for only 10% down and that is the "reason" to choose SF over the conventional loan. Now yes it counts against you, but you got your low DP benefit but it's a higher rate which is its "negative". You can buy with SF wait out some appreciation and principal pay down, get the income shown coming in ect. Now you can rate and term refi into a conventional loan with a lower rate and not have to actually put the 25-30% down. They will be basing your loan on the appraised value, not your purchase price which could mean on paper your are financed at 75% LTV when in reality you only have your original 10% down actually in the deal.

So there could still be a reason to go with the SF now even though you haven't hit your 10 financed property limit.

Chris Simmons · Answer

I don't work for Fannie and can't quote their policy, but as a commercial banker, technically loan workout officer and fellow investor, I can tell you what i know first hand.  if it is financed in your llc name and tax id, then it is not you.....and it is not a traditional mortgage.  Not sure I have ever heard of a sole prop llc before.  It is a commercial loan.  Even if you have to sign a personal guaranty, which you will, it is not a mortgage.  When you go to the commercial side, you will be looking at either a revolving line of credit or a 5 year term loan with a 20 year amortization schedule and balloon note.  I have not found anyone in my area that does long term, fixed rate loans on residential real estate.  So your payments would be like it was a 20 year loan, but you make 59 principal and interest payments and payment 60 is the remaining balance.  Of course, the expectation is that you can renew the loan, maybe even increase the loan amount or modify the terms some how.  The rate will be variable and you get the wonderful, exciting joy of submitting financials yearly at minimum, getting commercial coverage for your property because it will be in the llc name....(state farm ain't touching that) and paying for an appraisal every 5 years.  If something doesn't work out or you can't renew the loan or refi it elsewhere  then you get transferred to the special assets department of the bank where you get to deal with fun people like me that accelerate your note for a variety of reasons before suing you for default, including my favorite one, as stated in paragraph 2 of the commercial loan agreement, we can demand payment in full at anytime.  If you are picking up on a slight hint of pessimistic sarcasm, I can assure you, it is not sarcasm.  As a matter of fact, I can tell you that investors of single family residential properties are against loan policy where i work.  If it isn't an apartment complex, they wont loan on it.  Granted, i work for a large bank and obviously will be going elsewhere for loans.  That said, i'm sticking with the conventional, consumer type loans for as long as possible.

Bob E. · Answer

After the 9/10 limit you might want to start looking at portfolio lenders.  Too, at that point you should be able to buy a property for cash every year to two.  Since there would be no debt on the cash purchase you can direct that income to buying the next property.  Pretty soon you should have an amazing cash flowing portfolio.

Jesse Gonzalez · Answer

@Erik Trefzger

- if the seller financed note is in my name, it does not help me get over the ten property limit, unless I am already at ten properties.

Answer=  Correct

- if the seller financed note is in my LLC's name (even though my LLC is a sole proprietorship), it does not count against my Fannie/Freddie limit, and I can use owner financing to eventually own more than ten properties (yet finance the full ten Fannie properties), even if I own less than ten now.

Answer=  LLC's are subject to the limitation, corporations are different.  Joint or total ownership of a property that is held in the name of a corporation or S-corporation, even if the borrower is the owner of the corporation and the financing is in the name of the corporation or S-corporation are not subject to the limitation.  If the financing is in the name of the individual, but ownership is held in the corporation then the limitations apply.

Jesse Gonzalez · Answer

@Erik Trefzger

1. Fannie Mae / Freddie Mac count the total number of mortgaged properties against your 10 property limit, not just Fannie/Freddie backed loans.

Answer=The financed property limit applies to the borrower's ownership of one- to four-unit financed properties or mortgage obligations on such properties and is cumulative for all borrowers. These limitations apply to the total number of properties financed, not to the number of mortgages on the property or the number of mortgages sold to Fannie Mae. Unless otherwise stated, these requirements apply to all mortgage loans whether underwritten manually or through DU.

3. I don't see how I can add a private mortgage to my portfolio and not have it count against my limit, thus reducing the number of Fannie/Freddie loans I can get by one.

Answer=  there are exceptions, if the property is over 4 units the max number of financed properties does not apply, if the property is commercial it does not apply, and if the ownership is corporate and the corporation is liable for the note, not the individual, it is not under the max property restriction.

4. Should I just wait until I hit the 10 property limit before pursuing any seller financed deal?

Answer= It depends on your personal situation and long term goals.

Erik Trefzger · Answer

@Chris Simmons Thanks for the response.  I have looked into commercial loans in the past and am pretty familiar with how they work; I've stopped in a few local commercial banks to chat with their loan originators and it's not for me right now.  I did have one lender express interest in paying off all of my 30 year notes and giving me one blanket loan to cover all of my properties but taking on a balloon loan is more risk than I care to take right now (especially given the 4% rates all of my mortgages are at).  In fact, all of the other scenarios you explained are precisely why I want to avoid commercial lending for now, although I do see how they could be helpful in the future.  In the scenario I was discussing above, I was referring to a seller financing my LLC for the SFR my LLC would purchase from them.  I am confused that you said you haven't come across sole-proprietor LLCs; I would assume that by far the bulk of LLCs are owned by one person or couple.  In fact, when a married couple are the sole owners of an LLC, it is still classified as a sole-proprietorship rather than a partnership (which is the case with our LLC).

David J. That's what I figured, and that is what the consensus appears to be.  So from what I can gather from these posts, it does not make sense to consider seller financing until I hit the 10 property limit, since that would just count against my conventional mortgage limit.

@Bob Estler Thanks for the input, I do intend on using portfolio lenders and seller financing after I hit the conventional limit, I was just trying to figure out if it made sense to explore those paths before I hit the limit (and it sounds like it doesn't).  In fact, I've already met one great portfolio lender locally who I look forward to doing business with in a few years once we get to that point.

Jesse Gonzalez · Answer

Fannie Mae just published a change to the multiple financed property guidelines regarding LLC's.  The following change is exempt from the maximum number of financed properties.  I don't think this helps you, but it's a change to the old rule.

"Ownership of a property that is held in the name of an LLC or partnership where the borrower(s) have an individual or combined ownership in the LLC or partnership of less than 25% and the financing is in the name of the LLC or partnership."

Does Seller Financing Count Against Fannie's Limit?

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