Loan Slots Towards 10 Fannie/Freddie Backed Loans

Mark S.Pro Member

OP

Rental Property Investor · KY · Member since 2013 · 1k+ posts · 537 votes

5y

@Nick Belsky, thanks for the quick response. I get that DSCR loan doesn't count towards Fannie/Freddie. My question is when that DSCR loan pays off 5 Fannie/Freddie backed loans (so homes aren't free and clear, they just no longer have Fannie/Freddie backed loans on them), does this DSCR loan OPEN BACK UP 5 of my Fannie/Freddie loan slots?

Nick BelskyBusiness Member

Residential and Commercial Broker · Member since 2021 · 1k+ posts · 704 votes

5y

Ah... Yes it would. Once they are no longer financed under conventional or FHA, that would free up a slot. Just don't be too quick about it. Your credit report and loan type will determine what counts towards the Fannie/Freddie limit. Give the report a few months to clear things up and get updated.

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Stephanie P.Pro Member

Washington, DC Mortgage Lender/Broker · Member since 2016 · 4k+ posts · 2k+ votes

5y

@Mark S.

The confusion comes from the wording and the fact that many brokers and lender's have an inherent lack of comprehension for the written word.

The Fannie Mae seller guide says "financed" properties count against your 10. That's pretty straight forward.

Here are the scenarios that trip the brokers and lenders above and subsequently frustrate borrowers.

Properties don't show up on credit; so what, they'll be on your taxes and conventional financing requires you to show your taxes and when you do, the underwriter will tie the financed properties to their mortgages and consider them financed.
They're in an LLC; so what, the LLC is a pass through entity that attaches to you personally and the lender, when you signed your closing docs, required you to personally guarantee the loan. If the loan is personally guaranteed, it is financed.
But I'm doing 5 properties with one loan; exactly. They're all financed with one loan.

The DSCR route works best in your situation, but it will not allow you to free up conventional slots. The only way to open up slots would be refinance higher equity properties and leverage them to pay off properties with smaller loan sizes making them free and clear.

Hope that clears it up.

Stephanie

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Mark S.Pro Member

OP

Rental Property Investor · KY · Member since 2013 · 1k+ posts · 537 votes

5y

@Stephanie P., so essentially if I have 4 loan slots open now, after a new DSCR loan, I still only have 4 slots. And now that they're all (the rentals) under the DSCR loan, it's even more difficult to implement the strategy you're describing with equity repositioning to pay off higher equity/lower LTV properties. I should expect that the 5 rentals covered by the new DSCR loan are now even more "permanent" in terms of not refinancing again later/ever.

So what it seems to come down to is whether or not to do the DSCR loan for other reasons (pull equity out for reinvestment, lower interest rate, etc.), but that re-opening loan slots isn't one of them (even when certain DSCR lenders are quick to tell me that my existing conventional Fannie/Freddie loans will no longer show on my credit report). It sounds like while technically it's true that they may not show on my credit report, that when underwriting for the next new purchase using a conventional Fannie/Freddie backed loan digs deeper, they will still count these 5 properties as financed and the new DSCR loan really didn't help me in that regard.

Am I following what you’re saying?

Stephanie P.Pro Member

Washington, DC Mortgage Lender/Broker · Member since 2016 · 4k+ posts · 2k+ votes

5y

@Mark S.

You hit all the points.

It won't show on credit for the most part (some lenders do report on credit), but when getting underwritten, the properties will be found on Schedule E whether in LLC or not.

Joe SplitrockPro Member

Moderator

Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes

5y

Originally posted by @Mark S.:

Not sure why this is such a difficult question. I've heard different things from different people. I've spoken with both DSCR lenders and conventional lenders. No one seems 100% sure. I've heard everything from yes, no, I don't know, and here, read these guidelines.

I have 6 conventional Fannie/Freddie backed loans: 1 on primary, 5 on single family rentals. This takes up 6 of the 10 allowed conventional loan slots, leaving me 4 loan slots for Fannie/Freddie backed loans. If I do a DSCR loan for the 5 rentals and in the process the 5 Fannie/Freddie backed rental loans are paid off, how many conventional Fannie/Freddie loan slots do I now have? 9? Still 4?

Some say it is based on loans. Some say it is based of financed properties (does a DSCR loan count then because those properties are technically still financed - only now by a DSCR loan instead?)?

Does anyone have a definitive, absolute answer on how this works?

There is no debate here, the limit is a "financed property" limit, so any property that is securing a loan. If 5 properties secure one loan, that is 5 financed properties. It doesn't need to be a Fannie or Freddie conventional type loan. I ran into the ten financed property limit and my primary residence only had a HELOC on it. The HELOC was just with a local bank, but it still counts as one financed property. Once I paid off the HELOC, it was no longer financed, even though the HELOC was still open. In your example, it sounds like those properties are all still financed, so it counts as 5 and not 1. It is also worth pointing out that more than one loan on a property just counts as one financed property, so a home with a conventional mortgage and HELOC is still just one financed.

I refinanced a couple properties last year and pulled cash out. I used the cash out to pay off two other properties. Effectively I converted 4 financed properties to 2 by doing this, because only two still have loans against them. This was a way to open up extra slots.

I am not sure I would be too worried since you only have 6 loans at this point. Be aware that underwriting has cash reserve requirements so as you add properties 7-10, it will get harder to meet underwriting. I wouldn't worry until you are at the limit, because a lot can change over a couple years.

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Lender · United States · Member since 2020 · 1k+ posts · 499 votes

5y

I've been in the DSCR game for several years. There's no limit on mortgages since they aren't on credit.

Lender · United States · Member since 2020 · 1k+ posts · 499 votes

5y

Originally posted by @Nick Belsky:

@Mark S.

Not sure why so much confusion... So a few things here:

DSCR are NOT fannie/freddie backed. They don't count towards the Fannie/Freddie limit of 10.

Each DSCR lender has its own limits. For example, some may say you can own no more than 5 properties in all. Some may say you can own as many as you want, but no more than 5 financed with them.

If you own properties that are free and clear, they are not financed and don't normally count in the number to your limit, HOWEVER, the taxes, HOA, and insurance costs will count toward your DTI. This matters when you are dealing with conventional or agency loans. It does NOT matter when dealing with DSCR as there is no personal income calculations.

I think some of the confusion from lenders is that there are different guidelines for different lenders. Sounds to me like you need to find a solid mortgage broker who is well versed in both conv/agency guidelines as well as non-qm guidelines with their specific lenders.

Cheers!

Nick Belsky

I've never in my life heard of a DSCR lender restrict anyone to a certain property count. In fact, the more properties you bring them, the more they reduce fees.

I'm in the middle of a 21 property refinance right now.

Mark S.Pro Member

OP

Rental Property Investor · KY · Member since 2013 · 1k+ posts · 537 votes

5y

@Timothy Hero, you're not reading the question. The question isn't about DSCR lenders doing loans. The question is whether or not a DSCR loan helps with new purchases of new properties on conventional loans. Per the above, it sounds like it does not.

Lender · United States · Member since 2020 · 1k+ posts · 499 votes

5y

Originally posted by @Mark S.:

@Timothy Hero, you're not reading the question. The question isn't about DSCR lenders doing loans. The question is whether or not a DSCR loan helps with new purchases of new properties on conventional loans. Per the above, it sounds like it does not.

Your question: If I do a DSCR loan for the 5 rentals and in the process the 5 Fannie/Freddie backed rental loans are paid off, how many conventional Fannie/Freddie loan slots do I now have?

My response: I've had clients bring several properties to me and do a simple rate and term refi just to get them off their credit and open up more conventional spots.

Why would it be any different for purchases since DSCR lenders don't report on credit regardless? The only mortgages that take up slots is conventional.

Mark S.Pro Member

OP

Rental Property Investor · KY · Member since 2013 · 1k+ posts · 537 votes

5y

@Timothy Hero, @Stephanie P.'s comments above seem to differ from yours. While the loans may not technically show on personal credit anymore, if in the process of going through underwriting for a new conventional loan in the future for a new purchase the properties are found on tax returns, then the DSCR loan effectively really didn't improve the remaining loan slot situation.

Stephanie P.Pro Member

Washington, DC Mortgage Lender/Broker · Member since 2016 · 4k+ posts · 2k+ votes

5y

@Mark S. and @Timothy Hero

If the DSCR lender requires a personal guaranty and the properties will show on Schedule E, the properties will be considered financed by a conventional underwriter and counted toward the number of financed properties.

Lender · United States · Member since 2020 · 1k+ posts · 499 votes

5y

Originally posted by @Stephanie P.:

@Mark S. and @Timothy Hero

If the DSCR lender requires a personal guaranty and the properties will show on Schedule E, the properties will be considered financed by a conventional underwriter and counted toward the number of financed properties.

My lenders require a personal guaranty and have never reported on credit. Not sure about the Schedule E, however.

Lender · United States · Member since 2020 · 1k+ posts · 499 votes

5y

Originally posted by @Mark S.:

@Timothy Hero, @Stephanie P.'s comments above seem to differ from yours. While the loans may not technically show on personal credit anymore, if in the process of going through underwriting for a new conventional loan in the future for a new purchase the properties are found on tax returns, then the DSCR loan effectively really didn't improve the remaining loan slot situation.

I see what you're saying. Putting your DSCR properties in an LLC will hide that. The properties will show on your tax form if you're reporting the income, but conventional lenders have no way of knowing if there's a mortgage tied to them or if you own them in cash.

Jared RineBusiness Member

Lender · Sacramento, CA · Member since 2009 · 1k+ posts · 277 votes

5y

@Mark S...I could add my $0.02, but listen to @Stephanie P. through your thread. She knows what she's talking about and actually paying attention to your questions.

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