Introducing Fannie Mae’s New 5% Down 2-4 Unit Loan
Fannie Mae Rolls Out 5% Down Multifamily Home Loans
It could mean big changes for multifamily home buyers.
Fannie Mae is known for lowering down payments as little as 3-5%. Before the change, that only applied to 1-unit properties.
A two-unit home (duplex) required 15% down and 3-4 unit homes required 25% down. Both will be reduced to 5%. That previous down payment levels hindered many would-be owner-landlords. Especially since these properties are much more expensive than a typical single-family home. A $500,000 triplex required a $125,000 down payment. But effective November 18, 2023, only 5% down will be required, or $25,000, a difference of $100,000 in this case. Following are additional examples of reduced upfront cash needed.
The changes apply to standard purchases, no-cash-out re nances, HomeReady, and HomeStyle Renovation loans for owner-occupied transactions.
What does this mean for multifamily homebuyers?
The benefits of the change can’t be overstated. Currently, the only low down-payment multifamily home loan (if you don’t have eligible military service) is the FHA loan. For just 3.5% down, buyers can own a 2, 3, or 4-unit home.
For duplexes, FHA works well. But this financing comes with a serious drawback for 3-4 unit properties: the self sufficiency test. In this test, the property needs to be able to cover its entire payment with rental income after a vacancy factor of 25%. For example, a 4-unit home with a $5,000-per-month full payment would need market rents of nearly $6,700 per month.
With mortgage rates at decades-high levels, virtually no property can pass FHA’s test. Now that Fannie Mae has rolled out a 5% down conventional option with no self-sufficiency requirement, many buyers could finally get pre-approved for a 3-4 unit property.
First-time buyers, house hackers, and those who just want to off set high mortgage payments could finally get a chance at homeownership and real estate investing.
Can first-time buyers use rental income to qualify?
In most cases, homebuyers, even first-time buyers, can use rental income from the 2-4 unit property to help them qualify. However, you must have a current housing expense (must be paying rent).
Those living rent-free can’t use future rental income to qualify for the loan.
Current renters who have no history of landlord experience can use future rental income to qualify, up to the amount of the full house payment.
Because the borrower’s future rental income is less than the payment, she can add it to her employment income, less a 25% vacancy factor. Future rental income, then, can go a long way toward helping you qualify for high home prices and mortgage rates that we’re seeing in the market today.
Why is Fannie Mae doing this?
According to the announcement, the agency wants to support: 1. Access to credit
2. Affordable rental housing.
With rents and mortgage rates rising, many buyers are looking for creative and alternative ways to a afford a home. This includes using rental income to o set the payment. This guideline update could help home buyers reduce their monthly cost of ownership.
Many have resorted to renting out a room to accomplish this goal. Now they might be able to purchase an actual multifamily property instead. Additionally, Fannie Mae says this move will encourage affordable rental housing. It’s unclear how an owner-occupied 2-4 unit home would provide more rental housing than it already is. Still, this is welcome news for anyone who wants to collect rent on their primary residence.
Maximum Loan amount $1,396,800 (no high-balance)
The announcement states that the change only applies to standard conforming loan amounts, not increased loan amounts in high-cost areas, known as high-balance loans. Still, this gives buyers plenty of room to purchase an expensive property, thanks to increased limits for 2-4 unit properties.
Assuming 5% down, purchase prices could be: $978,785 maximum price for 2 units $1,183,050 maximum price for 3 units $1,470,315 maximum price for 4 units
Buyers making larger down payments could purchase even more expensive properties. Again, with no FHA self-sufficiency test, buyers have a whole new world opened up for them.