Fannie Mae now has a policy that pertains to multiple mortgages to the same borrower when that borrower is buying an investment property. Fannie Mae’s current policy limits the number of 1-4 unit financed properties in which the borrower may have an individual or joint ownership interest to four financed properties when the new mortgage being done is secured by an investment property or second home.

The limitation on the number of mortgages one currently has applies to the total number of properties financed, including financing done by seller held financing, Fannie Mae, Freddie Mac or a portfolio lender. This limitation has to do with “any and all” financing that an investor has used to finance a property.

In the past, Fannie Mae had modified this policy to allow investor and second home borrowers to own five to ten financed properties if they met certain eligibility and underwriting requirements. They no longer make any exceptions.

These sorts of rules are why most investors now get financing through non-traditional sources, and some even use “private lenders” who lend their own money and tend to charge much higher rates.

The moral of the story is that if you own four financed properties its the end of the line for you to get another mainstream Fannie Mae loan.

However, this limitation is NOT in place if you are buying or refinancing a new home that is legitimately your primary residence. When financing a primary residence, you can own any number of financed properties. I say “legitimately your primary residence” because investors will commonly ask me, “let’s just say this house I want to refinance is my primary residence”, even though we all know its rented out. You will NOT be able to pull this fast one any more as an investor, when your tax returns, bank statements and other documents all show your “real” primary residence address. For more on why its hard to get one over on an underwriter, click here for an interesting blog on that topic.

It seems mortgage rules change frequently, below is the latest on down payment requirements.

For a primary residence you need a down payment of:

3.5% for an FHA Conforming loan ($417,000 or less).

3.5% for an FHA-Jumbo loan ($417,001 to $729,750, in high cost markets).

5% down for a Conventional Conforming loans ($417,000 or less).

10% for a Conventional-Jumbo loan ($417,001 to $729,750, in high cost markets).

20%-25% down payment for most Jumbo loans, or even 30% or more depending on the loan size.

For an investment property you can currently only get a Conforming loan (loans up to $417,000) and that requires a minimum of 20% down payment.

I think investment property down payments will increase. The history of these loans is that they required 30% down when I first got in the business in 1986. In the early 2000′s during the real estate boom, this quickly went to 20% down, then 10% down, and then even 0% down for a while! Then they went back to 10% down, and currently 20% down, next stop…?

And all of these requirements are subject to change due to credit scores, property type (multifamily properties may require more down payment, for example), and more.

It has been established, for as long back as my 25 year mortgage career goes, that if a condo has a high investor level, you were going to have a hard time getting mortgage approval and/or PMI approval if you were putting down less than 20%. The investor level of a condo is how many units of the total investors own. For example, if a condo has 100 units, and 60 are owned by investors to be rented out and 40 units are owned as primary residences, then the condo has a 60% investor level.

It was always said that banks, Fannie Mae, Freddie Mac and PMI companies wanted to see at least 51% owner occupancy and no more than a 49% investor level. And many times a bank, PMI company or Fannie Mae might even require 60%, 65% or even 70% owner occupied levels, restricting the investor level to a low level. It has been historically shown that condo buildings that are more heavily owner occupied have better performing loans with fewer delinquencies, and this is why Fannie Mae, Freddie Mac, banks and PMI companies analyze this data.

However, I have discovered a guideline change for Fannie Mae and Freddie Mac that says if loan is for a primary residence and if the condo building is established, that there is no analysis of the investor level at all. What defines a condo building as established is that the building is at least 90% sold and settled, no additional construction is planned, and that the homeowners association has been turned over from the developer to the unit owners.

The big news here is that if you have an established condo building, and are buying a unit as a primary residence, and have 20% down payment, then you do not have to worry about the investor level. On the one hand, if you love a certain unit and want to buy it at all costs, then this is good news. Of course, you may want to give consideration to buying in a heavily investor owned building for the same reasons that the banking industry does. But here are some scenarios where this has benefited the consumer:

-A client of mine wanted to refinance a loan in a condo building that has 12 units, 4 of which were owned by owner occupants, 7 were owned by investors, and 1 was still pending sale. The building had met the 90% sold and settled requirement, the homeowners had been in control of the association for over a year, and the unit my client wanted to refinance was his primary residence. With an owner occupancy of 33% and an investor level approaching 66% (depending on who buys the last unit) this building would have been impossible to finance up until recently. Under current rules my client will be able to take advantage of refinancing to drop his interest rate quite a bit.

-A client I have done loans for in the past wants to sell some condos he owns in a highly investor owned condo building. He was concerned that his buyers would not be able to get financing. I was able to tell him the good news that he could ensure his buyers financing as long as they were buying a unit as a primary residence and were qualified.

-A client wanted to buy a condo unit to live in as a primary residence in a building with a 51% investor level, with only 49% owner occupants he was concerned he would not be able to get a loan. I told him that as long as the building was established he would be able to get a loan.

This is big news for many condo buildings that have historically had higher investor levels and have thought they may be locked into being labeled as being a building that is hard to get financing in. These latest rules will help sellers sell, and buyers buy, and condo buildings get some investor owned units back in the hands of owner occupants.

There seems to be a lot of confusion around what an approval letter is, what a pre-approval letter is, and what these documents are worth since some don’t seem to hold up when it comes time for the underwriter to approve the loan and issue a final commitment letter.

All these letters are usually issued prior to writing an offer on a home. The buyers use them to show the sellers that they are going to get their loan and should have no problem. Some people think these letters are iron clad, and many people seem to confuse what they really mean.

An approval letter means the loan is approved, this is akin to a commitment letter. And there is no way for any lender to issue an approval letter without all documentation (W2′s, tax returns, bank statements, pay stubs, etc.) in the file, including the appraisal, and that is usually never the case when an offer is being written. So if you get an “approval letter” when making an offer, the bank or lender is likely using the wrong semantics, and the letter should be written as a “pre-approval” letter.

A pre-approval letter means someone (the loan officer, mortgage broker or the underwriter) has reviewed the finances of the buyer and that things look OK. It may mean the lender has run the numbers through an automated underwriting system and gotten an approval (pending receipt of the appraisal and other documentation). It may mean the lender has crunched the numbers on the back of an envelope and everything appears OK. It usually includes a credit report being pulled. No matter what the letter says in writing, all parties should be asking a lot of question as to what work actually went into the letter:

-were the buyer’s income and assets documented, or just verbally noted?

-was a credit report pulled, if so was it a report that included all 3 credit scores from all 3 credit bureaus, or was it just 1 credit score (a bank will ultimately require all 3, and the best pre-approval letters should be based on all 3 scores).

-was the loan run through an automated underwriting system or not?

-how long is the pre-approval letter good for?

The trouble is that buyers don’t want to do the work to get as strong a pre-approval as possible, which includes W2′s and/or tax returns, bank statements, pay stubs and possibly more. Most buyers just want to quickly review some numbers verbally with the lender and get a piece of paper within minutes that says their loan is approved.

Sellers deserve to know if the buyer is approved or pre-approved, and how solid the pre-approval is and what it is based on. For buyers that may be reading this, think if you were a seller, and what you’d like to see and what you’d expect if you were going to take your home off the market and rely on a buyer to perform as promised.

Some buyer’s have relied on weak approval or pre-approval letters, and have lost their earnest money deposits! I had a buyer call me who was self employed for only 6 months (you must be self-employed for at least 2 years) and somehow got a pre-approval letter from a loan officer at a bank. The loan ultimately got denied, and they lost their $50,000 deposit! They came to me after going to the first lender, and I was able to find a loan option for them that included co-signing parents, and we wrote a new offer on the same property since the first one was voided and the seller’s had not sold the place, and we salvaged the loss of their deposit. But, it was a close call, and they almost lost the $50,000.

So buyers should offer up a lot of information, not balk at sending in some paperwork, and take some time and make sure they are getting a solid pre-approval letter.

And sellers and Realtor’s should ask a lot of questions to see what the pre-approval letter is based on.

When buying a home the appraisal contingency addendum in a sales contract says the home buyer has a certain number of days (the date is negotiable) to get an appraisal that is equal to or greater than the sales price in the sales contract. If the appraisal is less than the sales price the buyer can still continue with the transaction, but they would have to pay the difference between the contract price and the lower appraisal in cash, or the buyer can propose that the seller agree to drop the contract price to the lower appraised value, or the buyer can declare the contract null and void.

But assuming the appraisal comes in at the agreed upon sales price, or higher, there still may be problems.

The underwriter may asked for a “desk review” of the appraisal, which may find cause for lowering the value. The underwriter may even ask for a second appraisal, which may come in below the value of the first appraisal. These types of appraisal “cross checks” are usually only asked for on higher loan-to-value loans, but the underwriter may ask for them for any reason. So there is obviously a cause for concern in some cases.

Another issue is that the turn around time of the appraisal is out of the control of the lender. There have been changes, the most important one is called the HVCC, that have caused turn times of appraisals to be uncertain.

There are answers to these problems. If the underwriter asks for a second appraisal this of course causes a question of whether to release the appraisal contingency based on only one appraisal when the second one may come in lower, and the loan may be rejected or altered. Usually if a buyer has proceeded in good faith, the seller will grant an extension to accommodate for the second appraisal, to allow for the extra time needed.

So if these problems occur it is not the end of the world. But buyers and sellers need to be aware of the potential for problems, should ask their lender a lot of questions up front as to the appraisal process, and should stay on top of the appraisal process the whole way.

Many people are not aware of a rule that has altered, made more expensive, or stopped people’s refinance attempts. This rule states that on a Conforming Loan (loans up to $417,000) or Conforming-Jumbo loans (loans from $417,001 to $729,750) if you are refinancing and paying off any 2nd trust (HELOC: Home Equity Line of Credit, or HELOAN: Home Equity Loan) that the transaction must be deemed a ‘cash out refinance’ as opposed to a ‘no cash out refinance’. This is important for several reasons.

The first important thing this rule changes is that if your loan is deemed a cash out refi, you are usually restricted to a lower Loan-To-Value (LTV). For example:

-you owe $300,000 on your 1st trust mortgage
-you owe $56,000 on a HELOC that was taken out subsequent to the purchase of the home.
-you want a new loan of $360,000 to refi the 1st, HELOC and closing costs for the refi into one new loan. Your home is worth $400,000
-the $360,000 loan is 90% of the $400,000 appraisal, and on a no cash-out refi a 90% LTV is acceptable (in some cases 95% LTV may be acceptable)
-however, since the rules now say that when paying off a 2nd trust the new loan must be called a “cash out refi” and since a cash out refi has a maximum LTV of 80%, this loan would be rejected, because 80% of the $400,000 appraisal is $320,000 and a new loan of $320,000 does not cover the payoff of the 1st trust and the 2nd trust.

Let’s take another more shocking example:
-a new refinance loan is desired of $600,000, to payoff a 1st trust of $540,000 and a $60,000 HELOAN taken out when the property was purchased.
-since this loan falls between $417,001 and $729,750 it is considered a “Conforming-Jumbo” loan, and the maximum LTV for this loan is 90% for a no cash out refi, and 60% for a cash out refi.
-let’s assume the home is worth $750,000
-80% of $750,000 is $600,000
-so the new loan was hoped to be an 80% LTV no cash out refi, with no PMI (Private Mortgage Insurance)
-however, the maximum new loan, since a 2nd trust is being paid off, is 60% of $800,000, or $480,000.
-and of course $480,000 does not come anywhere near being enough to do what is needed on this hypothetical loan.

A last example, and surprisingly the most “make sense” example of all the three classes of loans:

-assume someone wants to refinance a Jumbo loan (one over $729,750).
-the loan to be refinanced is $1,000,000, comprised of paying off an $800,000 1st trust and a $200,000 HELOAN that was taken out after the home was purchased.
-the home is worth $1,500,000
-on Jumbo loans, the rules are different than Conforming and Conforming-Jumbo loans, Jumbo loans state that as long as the 2nd trust being paid off is either:
1. a HELOAN taken out when the property was purchased, or…
2. a HELOC (regardless of when it was taken out) that has not had more than $2,000 drawn against it in the last 12 months…
-then the loan can be deemed a no cash out refinance, and you can use the higher LTV’s allowed.
-this policy should be (and used to be) used across the board on all loan types!

The reason that this is even an issue in the first place is that lender’s worry that when people take cash out through a 2nd trust, at some point in the history of the property, that refinancing that amount into a new loan should then still be called a cash out refi.

The problems are that the LTV’s are lower on a cash out refi, the rates are usually a bit higher, and the underwriting can be more strict on a cash out refi versus a no cash out refi.

So refinancing a 1st and 2nd trust together into one loan is not quite as simple as you’d think. Take into account the above, and as always, make sure you are dealing with a “very” seasoned mortgage lender. The rules are so complicated and change so quickly, you need an experienced professional now more than ever.

Some people think that getting a cosigner on a mortgage loan is a cure-all, and will automatically make someone qualify for the loan they seek. This is not so.

First, the cosigners will need to be scrutinized for their own income and debt load, and the qualifying numbers and debt ratios will still need to make sense. For example, if you have a cosigner that has a large mortgage of their own, two car loans, credit card debt, and student loans, I would doubt that their income is going to help in any cosigning situation. In other words, people seem to think that a cosigning obligation stops at just putting their name on some documents. The actuality is that when you cosign a loan the bank and underwriter will take into account all of your financial information, and expect you to make payments if the primary occupants that needs cosigning help cannot.

I wrote a blog about the pros and cons of cosigning a loan. As long as the primary occupants makes their mortgage payments, it is not a hindrance at all to the cosigner.

Another important thing to note is that cosigning may not even be allowed on some loans, or may have a diminished benefit on others. For example, on an FHA loan a non-occupant cosigner is allowable. But on most conventional loans a non-occupant cosigner is either not allowed, or the bank will still require that the primary occupant qualifies for the bulk of the loan, allowing the non-occupant cosigner only to help qualify for a smaller part.

If you have a son or daughter who has minimal to no income, but you want to help them buy a home, with a conventional loan a non-occupant cosigner would usually not work in that situation. But it would on an FHA loan, as long as the debt ratios made sense when considering everyone’s income and debts, even if the children had little to no income.

As with everything in the mortgage world, you need to speak to an experienced and qualified professional, before making any assumptions about writing an offer based on what you think you can qualify for in the way of a mortgage loan.

If you are looking to buy a new house, and want to keep your current home as a rental property, on a Conventional loan you need to show the lender making the loan on your new home some things that you would not if you were selling your current home instead of renting it. You need to show 6 months “cash reserves” after the down payment and closing costs on the new house, and you need a 70% loan-to-value (LTV) on your current home, as evidenced by an appraisal.

If you meet both of these requirements, you can count the rental income on your current house to offset the mortgage, which will help you qualify for the new mortgage. Otherwise, you will have to qualify for the new mortgage carrying “all” the debt on the current mortgage and using no rental income to offset the debt, and usually most people cannot qualify for two mortgages at the same time.

And if you do meet the cash reserves and the 70% LTV requirements outlined above, the banking industry will only count 75% of the gross rent on your current home (as evidenced by a lease) to offset the mortgage. They take away 25% to account for vacancies, expenses and maintenance. So if you have a $3,400 a month mortgage, and can show a $4,000 a month lease, they will only count 75% of that $4,000 a month lease (or $3,000) against the old mortgage. In this case, $4,000 gross rent, with $3,000 net rent (after 25% deduction) would leave a $400 a month shortfall against the $3,400 a month mortgage and would be counted against you as a debt in your debt ratios.

When people learn of the above, they end up realizing that in many cases they need to sell their current property, if if they have a desire to keep it as a rental property.

If you are taking out an FHA loan for your new purchase, the rules are the same except you only need a 75% Loan-To-Value on the current home, as evidenced by a recent appraisal. Either way, buying a new home without selling yours and trying to rent it has become much more difficult.

There are times when a lender might enter a loan application into the automated underwriting system, and the resulting approval may allow for a “PIW”. A PIW is a Property Inspection Waiver, which means that Fannie Mae or Freddie Mac has decided that due to the characteristics of the particular loan entered that they feel comfortable proceeding without an appraisal being done.

These PIW’s are usually seen on loans with low Loan-To-Value’s (LTV’s), such as 50% up to even 80%, with high credit scores, and low debt ratios.

I have alerted some clients that I can refund most or all of their initial appraisal fee, and tell them that if they choose, no appraisal is needed. Some borrowers still want an appraisal done anyway but many realize that the market is usually pretty efficient, they feel comfortable with the price they paid, and they’d rather save the appraisal fee.

There may be a $75 PIW fee, so if the appraisal cost was $400, the consumer would net a $325 refund by accepting the PIW.

However, a homeowner may be tasked with getting an appraisal anyway by their homeowners insurance company. So the consumer should check with their insurance agent to see if an appraisal is mandatory to establish the level of insurance coverage, or if another method of establishing value is possible.

If you have a low LTV, a high credit score, and a low debt ratio, ask your lender if you qualified for a PIW if they do not mention it. Getting a PIW is not a guarantee, even with all of the above stellar loan traits, but its worth asking about.

A Non-Warrantable Condo is not a new style of condo, it is a condominium that does not meet the minimum standards set by Fannie Mae and/or Freddie Mac. In other words, the condo cannot be warranted to meet Fannie/Freddie guidelines. Most lenders will want a condo to be warrantable to Fannie or Freddie so that the loan can be sold to Fannie or Freddie, especially now that most banks and mortgage lenders are only selling to Fannie Mae and Freddie Mac. If a condo is not able to be warranted to Fannie/Freddie guidelines, it is usually due to the fact that the condo has a high investor level. Lenders prefer to see that a condo has 51% or more owner occupants with no more than 49% rentals, and in actuality they really prefer 60% owner occupied, or higher.

But there are a whole host of other things that a lender will analyze when looking at a condo to see if it meets Fannie/Freddie guidelines, and the rules vary depending on if the condo is new construction or existing/resale, such as:

1. Are the homeowners or developers in control of the homeowners association?
2. Is the project is subject to additional phasing or add-ons?
3. Are all common elements and amenities are completed?
4. What percentage of all units in the development are sold?
5. Is the condo undergoing any litigation?
6. Are of any of the unit owners behind on their dues?
7. And of course, what percentage of the units in the development have been sold to owner occupants?
8. And there is even more…

The bottom line is that when you are buying a condo, the banks and mortgage lenders will not only be underwriting your creditworthiness, they will also be underwriting the condo.

A CONDO QUESTIONNAIRE MUST BE COMPLETED BY THE PROPERTY MANAGEMENT COMPANY TO DETERMINE THE CONDO’S ELIGIBILITY.

Of course, you may not need a condo questionnaire if your loan approval comes back with a “Limited Review”, which I just blogged about here.

The bottom line is that getting a condo loan is more difficult than meets the eye, and has a lot to do with the borrower’s down payment, credit score, debt ratios and the condo itself. When looking to buy a condo always call a mortgage professional who can help research the financing options up front before you waste your time going under contract. When listing a condo for sale (attention all Realtors and sellers) ALWAYS consult a mortgage lender for advice on what type of financing is available and how much down payment will be required, so that you can properly market the condo for sale.