Financing multiple 1-4 unit properties with Fannie and Freddie

[Carlos Flores]

I've seen several posts lately about the number of 1-4 unit properties one can finance with Fannie Mae and Freddie Mac, and their respective guidelines. While the two GSE's are somewhat similar, it's important to remember that Fannie and Freddie are separate entities, each with their own underwriting rules.

Let me get the easy part of of the way first. As of this writing, Fannie's limitation is 10 and Freddie's is 6. What follows is directly from the respective agency and current as of this post. Enjoy!  

Fannie Mae Selling Guide (published October 24, 2016) - B2-2-03: Multiple Financed Properties for the Same Borrower (03/29/2016)

Limits on the Number of Financed Properties

If the mortgage loan being delivered to Fannie Mae is secured by the borrower’s principal residence, there are no limitations on the number of other properties that the borrower will have financed. If the mortgage is secured by a second home or an investment property, the multiple financed properties policy applies. The maximum number of financed properties that are permitted is based on the underwriting method, as described later in this topic.

The financed property limit

• applies to the number of one- to four-unit residential properties where the borrower is personally obligated on the mortgage(s);
• applies 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;
• includes the borrower’s principal residence if it is financed; and
• is cumulative for all borrowers (though jointly financed properties are only counted once).

The following property types are not subject to these limitations, even if the borrower is personally obligated on a mortgage on the property:

• commercial real estate,
• multifamily property consisting of more than four units,
• ownership in a timeshare,
• ownership of a vacant lot (residential or commercial), or
• ownership of a manufactured home on a leasehold estate not titled as real property (chattel lien on the home).

Examples — Counting Financed Properties

• The borrower is personally obligated on mortgages securing two investment properties and the co-borrower is personally obligated on mortgages securing three other investment properties, and they are jointly obligated on their principal residence mortgage. The borrower is refinancing the mortgage on one of the two investment properties. Thus, the borrowers have six financed properties.
• The borrower and co-borrower are purchasing an investment property and they are already jointly obligated on the mortgages securing five other investment properties. In addition, they each own their own principal residence and are personally obligated on the mortgages. The new property being purchased is considered the borrowers' eighth financed property.
• The borrower is purchasing a second home and is personally obligated on his or her principal residence mortgage. Additionally, the borrower owns four two-unit investment properties that are financed in the name of a limited liability company (LLC) of which he or she has a 50% ownership. Because the borrower is not personally obligated on the mortgages securing the investment properties, they would not be included in the property count and the result is only two financed properties.
• The borrower is purchasing and financing two investment properties simultaneously. The borrower does not have a mortgage lien against his or her principal residence but does have a financed second home and is personally obligated on the mortgage, two existing financed investment properties and is personally obligated on both mortgages, and a financed building lot. In this instance, the borrower will have five financed properties because the financed building lot does not need to be included in the property count.

Reserve Requirements

Additional reserve requirements apply based on the number of financed properties the borrower will have. The borrower must have sufficient assets to close after meeting the minimum reserve requirements. See B3-4.1-01, Minimum Reserve Requirements, for the financed properties requirements.

Applying the Multiple Financed Property Policy to Manually Underwritten Loans

If the borrower is financing a second home or investment property that is manually underwritten, the maximum number of financed properties the borrower can have is six. Fannie Mae's standard eligibility policies apply (for example, LTV ratios and minimum credit scores). The lender must determine that the borrower meets the minimum reserve requirements that apply to multiple financed properties.

Applying the Multiple Financed Property Policy to DU Loan Casefiles

If the borrower is financing a second home or investment property that is underwritten through DU, the maximum number of financed properties the borrower can have is ten. If the borrower will have one to six financed properties, Fannie Mae's standard eligibility policies apply (for example, LTV ratios and minimum credit scores). If the borrower will have seven to ten financed properties, the mortgage loan must have a minimum representative credit score of 720; all other standard eligibility policies apply.

DU will determine the number of financed properties for the loan casefile based on the following approach:

• If the Number of Financed Properties field is completed, DU will use that as the number of financed properties. The lender must complete this field with the number of financed one- to four-unit residential properties (including the subject transaction) for which the borrower(s) are personally obligated.
• If the Number of Financed Properties field is not provided, DU will use the number of residential properties in the Real Estate Owned (REO) section that include a mortgage payment, or that are associated with a mortgage or HELOC in the liabilities section of the loan application, as the number of financed properties.
• If the Number of Financed Properties field and the REO information was not provided, DU will use the number of mortgages and HELOCs disclosed in the liabilities section of the loan application as the number of financed properties.
• When none of the information above is provided on the loan application, DU will use the number of mortgages and HELOCs disclosed on the credit report as the number of financed properties.

Note: In order to account for the subject property, DU will add "1" to the number of financed properties on purchase and construction transactions when the REO section, number of mortgages on the application, or number of mortgages on the credit report are used as the number of financed properties.

After determining the number of financed properties, DU will use that value to assess the eligibility of the loan, including the minimum credit score requirement for seven to ten financed properties, and the minimum required reserves the lender must verify.

DU will issue a message informing the lender of the number of financed properties that DU used and where that information was obtained (Number of Financed Properties field, REO section, number of mortgages on application, or number of mortgages on credit report). If DU used the information provided in the Number of Financed Properties field or in the REO section as the number of financed properties, and that information is inaccurate, the lender must update the data and resubmit the loan casefile to DU. If DU used the number of mortgages and HELOCs on the loan application or credit report as the number of financed properties, and that number is inaccurate, the lender must provide the correct number in the Number of Financed Properties field, or complete the Real Estate Owned section of the loan application and resubmit the loan casefile to DU.

Exception

DU Refi Plus and Refi Plus mortgage loans are exempt from the multiple financed property policies. See B5-5.2-02, DU Refi Plus and Refi Plus Underwriting Considerations, for additional information.

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Freddie Mac

Multiple financed properties

Effective for Mortgages with Settlement Dates on or after October 26, 2015, we are revising our multiple financed property requirements as follows:

• Increasing from four to six the maximum number of financed properties that the Borrower may own or be obligated on when the transaction is a second home or an Investment Property Mortgage
• Clarifying certain types of properties that should not be included in the count of financed properties

Guide 4201.16: Investment Property Mortgages (03/02/16)

Freddie Mac will purchase Investment Property Mortgages under the terms of the Purchase Documents and this section.

(a) Eligible Mortgages

(i) Each Investment Property Mortgage must comply with Section 4203.4

(ii) Each Investment Property Mortgage must be an Accept Mortgage, an A-minus Mortgage or a Manually Underwritten Mortgage with a minimum Indicator Score as set forth in Exhibit 25, Mortgages with Risk Class and/or Minimum Indicator Score Requirements 

(iii) Mortgages with temporary subsidy buydowns are not eligible for delivery as Investment Property Mortgages 

(iv) Freddie Mac will purchase Investment Property Mortgages made to Borrowers who own more than one financed Investment Property, provided that the Investment Property Mortgage being sold to Freddie Mac is: 

■ An eligible fixed-rate, level-payment Mortgage, or 

■ A 7/1 or 10/1 ARM, and

■ Not an A-minus Mortgage

(b) Special underwriting requirements An Investment Property Mortgage delivered to Freddie Mac must meet the following special underwriting requirements: 

(i) For newly constructed homes that are purchase transactions, the Borrower may not be affiliated with or related to the builder, developer or property seller 

(ii) Each Borrower individually and all Borrowers collectively must not own and/or be obligated on (e.g., Notes, land contracts and/or any other debt or obligation) more than six 1- to 4-unit financed properties, including the subject property and the Borrower’s Primary Residence. Examples of financed properties that do not have to be counted in this limitation include:

■ Commercial real estate

■ Multifamily (five or more units) real estate 

■ Timeshares 

■ Undeveloped land 

■ Manufactured homes not titled as real property (chattel lien), unless the property is situated on the land that is titled as real property 

■ Property titled in the name of the Borrower’s business provided that the Borrower, in his or her individual capacity, is not on title and/or is not obligated on the property

■ Property titled in the name of a trust where the Borrower is a trustee, provided that the Borrower, in his or her individual capacity, is not on title and/or not obligated on the property 

(iii) The monthly housing expense related to the Borrower’s current Primary Residence must be used in calculating the Borrower’s monthly housing expense-to-income ratio 

(iv) Regardless of whether rental income from the Mortgaged Premises is used in qualifying, the reserves requirements in Sections 5501.2 and 5501.3 must be met 

(v) The aggregate negative rental income from all rental properties must be treated as an obligation and considered in calculating the Borrower’s monthly debt payment-to-income ratio 

(vi) Borrower Funds must not include gifts from a Related Person or gifts or grants from an Agency as described in Section 5501.3(c) 

(vii) If rental income is not used for qualifying, the monthly payment amount (as described in Section 5401.2) for the Mortgaged Premises plus operating expenses must be used in calculating the monthly debt payment-to-income ratio.