What if a 5th mortgage is your primary residence?

Question

We have 2 investment properties financed as well as our primary residence for a total of 3 mortgages. We are also on the hunt for a new home (in a very specific neighborhood so it may take awhile) and plan to hold onto our current home as another investment property. If we found and financed another investment property before we found our next primary home, that would give us a total of 4 mortgages. How would that impact our financing options for our new home once we find it? What would the implication be for the 5th mortgage on the new home we plan to occupy if it were to become our primary mortgage, if we do NOT plan to sell our current primary home but rent it. Also, this is assuming all investment properties EXCEPT our current primary home are rented and income producing. And are the implications the same for either conventional OR renovation loans?

In my research on the 5-10 loans I've found nothing about primary versus investment property. Is it as simple as a mortgage is a mortgage when it comes to anything over 4 and it doesn't matter that the 5th will be a primary? Do the down payment and PITI reserve requirements still apply for primary if it's the 5th? We have a great deal opportunity that we want to BRRRR but we also want to move and don't want to ruin our chance at being able to finance our new home if we grab this deal.

Thanks!!

In my research on the 5-10 loans I've found nothing about primary versus investment property. Is it as simple as a mortgage is a mortgage when it comes to anything over 4 and it doesn't matter that the 5th will be a primary? Do the down payment and PITI reserve requirements still apply for primary if it's the 5th? We have a great deal opportunity that we want to BRRRR but we also want to move and don't want to ruin our chance at being able to finance our new home if we grab this deal.

Thanks!!

Andrew Postell · Answer

@Zoe Mercier just in case there is any confusion here, the Fannie/Freddie limit on mortgages is 10.  And if you were to ever buy your primary home, they will allow you to get another loan with them.  So if you are at 10, then you can get an 11th as long as it's your primary home.

When you purchase a primary home using Fannie/Freddie money you are committing to occupy the property within 60 days of closing and for 12 months.  So if that's the case, then standard primary home loan rules apply - essentially 5% down if you wanted to on a Single Family Home.

The main crux of this scenario to me is do you need rental income from your vacating primary home to qualify?  Or even on that property you are BRRRR'ing?  And that answer needs to come from whatever lender you choose to work with.  MAKE SURE you are working with a lender that will use rental income IMMEDIATELY to help you qualify (if you need it).  So if they do NOT follow that rule - please go to a different lender.  There are plenty that will use rental income immediately.

Hope all this makes sense but feel free to ask anything additional if you need. Thanks!

Stephanie Medellin · Answer

@Zoe Mercier

1.  No, all rental properties do not need 2 years of rental history to count rental income.  In many cases the most recent year of schedule E income will be used, and if the property is not listed on Schedule E yet (if it was recently acquired), then 75% of the lease amount will be used.  Typically you'll need to show proof of the first month's rent and security deposit, so make sure to get a check from the tenant and don't accept cash.

2.  I think what you're looking at is a bit old.  Reserves will be determined by a percentage of your unpaid principal balances on your investment property mortgages.  You will need reserves on your investments, even if you're buying a new primary.  Some lenders have added overlays increasing reserve requirements in order to use rental income due to Covid-19, so this may vary.

If cash is tight, I would recommend finding a mortgage broker in your state who can access the loan you need (with the fewest or no overlays).

Zoe Mercier · Answer

Hi Andrew.

Thank you for your response. That does make sense. And no, we won't have rental income from the home we currently occupy. We actually had a new primary home under contract but backed out after the home inspection so just went through this with a potential lender. Having that debt and no income from it does negatively impact our debt-to-income ratio and therefore the amount of loan we qualify for. But we came in just enough to get a house in the neighborhood we want to move to.The other variable here that I didn't mention, is that we will put our primary house search on hold for the 6 month seasoning period because we are using the cash we have for the downpayment to secure the new investment property.

The only thing I still wonder is if the 5th mortgage is a primary mortgage and not an investment, do the 5-10 mortgage rules apply? Most of the rules aren't an issue for us. But 2 of them worry me and make me wonder if it'll get in the way of us getting another home to move to if we get this deal.

• There must be 2 years of tax returns which rental income from all rental properties (if we buy the deal house it'll be with cash and we will hold for 6 months and then finance to cash out. So it will not be rented for 2 years because we hope to find the house within the year once we refinance after the 6 month seasoning period.)
• There must be 6 months of PITI reserves on each of the financed properties (will we have to show this to get the 5th mortgage even if it's primary? Might be a challenge when some of our cash-on-hand is going towards the down payment.)

Thanks again!