Big Changes to Second Home and Investment Mortgages

If you have plans to purchase a second home or invest in the near future, hold on tight!

Fannie Mae is changing the eligibility of loans by second home and investment properties. As announced on March 10th in a Letter to Lenders, the number of Fannie Mae loans allowed for second homes has been reduced to 7% (roughly half of the usual percentage).

The ability to acquire second home and investment loans will be affected by tightened credit score requirements, increased down payments, and Desktop Underwriter approval.

Breakdown

To refresh, Fannie Mae is a federally-backed mortgage financing entity, whose purpose is to maintain affordable mortgages across the country. Because these loans are guaranteed by the government, Fannie Mae creates security for lenders and lowers the national average mortgage cost.

The Fannie Mae amendment was mandated by the Senior Preferred Stock Purchase Agreement (PSPA) and the Federal Housing Finance Agency (FHFA). As of April 1st, there is a 7% limit of acquisition of second home and investment properties. Second homes must be underwritten and approved with Desktop Underwriter — an automated system that determines loan eligibility based on approval requirements. Due to these limitations, credit score and down payment requirements will likely increase. Although an official statement has not yet been made, down payments are expected to increase by 15%, and credit requirements to 620.

Even as down payments increase, this change will further raise the costs for borrowers. Penny Mac (the major buyer of Fannie Mae loans) raised second home loan charges by 2.25%, beyond a 25% down payment. For those unable to fulfill a 25% down payment, the borrower will be charged 5% of the loan amount… that’s astronomical!

Whom Does This Affect the Most?

Is anyone exempt? The only exception, as stated in the announcement letter, is for “high LTV refinance loans that are manually underwritten in accordance with the Alternative Qualification Path and delivered with Special Feature Code 840.

As the down payment requirement increases, regardless of credit score, the average Buyer may have a harder time acquiring a second home or investment loan. Although not all lenders are making immediate changes, I would expect widespread changes to be implemented very soon. If you are beginning the process of financing a second home, check in with your lender and mortgage broker regarding whether your rate is locked.

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