4th Property - Pay off or wait 2 years?

[Lawrence Paul]

Just recently purchased my 4th property and was wondering your guys thoughts...

Should I pay off my 4th property or wait two years to quality for the 5-10 rule?

[Lawrence Paul]

If you have 5 to 10 homes in your portfolio, it is possible to get a mortgage, but it can be difficult.

• In 2009, Fannie Mae increased the maximum financed-property limit from four to ten.
• Most banks won’t offer a 5-to-10 properties mortgage because the process of underwriting the investor’s mortgage application can be very hard work.
• To finance a home via Fannie Mae’s 5-1o Properties program, there are many criteria that must be met, including a minimum credit score of 720, substantial down payment requirements (for purchasing) and equity (for refinancing), no bankruptcies or foreclosures in the past 7 years, and more.

Real estate investor mortgages

In 2009, Fannie Mae rolled back a mortgage rule that prevented real estate investors from financing more than 4 properties at once.

At the time, investors were limited to 4 properties financed, which included their primary residence.

Today, the maximum number of allowable, simultaneously financed properties is 10. You wouldn’t know it, though — few banks actually offer the program.

You can finance more than 4 properties at once

You can finance more than 4 properties at once

In February 2009, Fannie Mae said it would up the maximum financed-property limit from four to ten to help stabilize the U.S. housing market.

“Experienced investors play a key role in the housing recovery”, it said.

This is a truth.

Real estate investors buy foreclosed homes, multi-unit properties, and vacant condos as a means to build wealth long-term.

And now, with rents out-gaining the rise in home prices in U.S. cities such as San Francisco, California; Fort Worth, Texas; and Seattle, Washington, investor types are clamoring for good homes — especially with financing so cheap.

15-year mortgage rates with points are below 3 percent.

Despite market options, though, investors can find it hard to find banks which offer financing for people with more than 4 properties already financed.

Even seven years later, Fannie Mae’s 5-10 Properties Financed program remains a niche product.

Maybe you’ve been turned away by your bank, too.

Why most banks won’t do a 5-to-10 properties mortgage

So, why don’t all banks participate in the 5-10 Properties Financed program? The probable answer is that underwriting a 5-property-owning investor’s mortgage application can be very hard work.

As compared "traditional" homeowners who submit for loan approval with just a W-2 and pay stub, a seasoned real estate investor is asked to provide complex tax returns, complete REO schedules, and extra detail for every home underwritten and approved.

Reviewing paperwork takes time. Sometimes, a lot of it.

Furthermore, investors with 5 or more properties financed are more likely to hold title to their homes in a non-standard fashion.

This, too, creates “extra work” underwriting which slows down the approval process for the subject home and for every other loan with the bank, too.

As compared to a standard purchase loan, loans for investors with more than 4 homes financed generates the same bank to the bank but with more man-hours required to approve and additional fraud risk post-closing. It’s no wonder most banks avoid them.

Note : Most banks, not all. You have to know where to find a 5-to-10 Properties loan. Then, you have to meet its guidelines.

The 5-10 financed properties program criteria

To finance a home via Fannie Mae’s 5-10 Properties program, the following criteria must be met with no exception :

• Own between 5 and 10 residential properties, each with financing attached
• Purchase : 25% down payment is required for 1-unit; 30 percent is required for 2-4 units
• Refinance : 30% equity is required for all property types (1-, 2-, 3-, or 4-unit)
• Minimum credit score must be 720
• There must not be any mortgage lates within the prior 12 months on any mortgage
• There must be no bankruptcies or foreclosures in the prior 7 years
• There must be 2 years of tax returns which rental income from all rental properties
• There must be 6 months of PITI reserves on each of the financed properties

That’s pretty much it. Tough, but not too tough.

You can even combine the delayed financing rule with the 5-10 Properties program to take cash-out from a home purchased free-and-clear at auction or otherwise.