Fannie Mae made an enormous announcement this week that
impacts anyone seeking to house hack – they reduced their downpayment
requirements on 2-4 unit properties to 5%. This is a massive difference from the 15%-20%
down that was required previously. The changes
don’t go into effect until November 18th, 2023 but that would be
reachable for anyone, even today, if they went under contract with a 40 day
close in order to execute after that effective date.
To be clear, this is for primary homes only. You are still required to put down 25% down
as a minimum with Fannie on 2-4 unit investment properties. Likewise, there was a 5% down option with
Fannie Mae’s HomeReady product when purchasing a duplex. However, the HomeReady product has income
limits that were somewhat low in certain markets. This change is for ALL borrowers, regardless
of income, who can qualify for Fannie Mae lending.
Now, why is this a big deal when FHA already offers a 3.5%
down product? Mainly because FHA has a
“self-sufficient” rule when purchasing a 3-4 unit property. This rule meant that the rent from the units
had to cover the ENTIRE mortgage payment with FHA. With home prices being so high and interest rates
being so high, the “self-sufficient” rule cause problems for many buyers using
FHA money.
With Fannie Mae, there is no such rule. Fannie Mae also doesn’t have a “funding fee”
that is attached to it like FHA loans.
FHA charges it’s borrowers 1.75% of the loan amount in a fee to take a
loan from them. They use this money to
fund future FHA loans. And while the
borrower doesn’t have to come to closing with this money (it’s rolled into the
loan) it’s still there – making an FHA loan have higher costs and higher APRs
because of it.
Another start difference between FHA and Fannie Mae is the
“PMI” or “MIP” premium that each will charge.
If you don’t use 20% down, then you pay a monthly fee into your mortgage
payment. With Fannie Mae, this monthly
surcharge will go away when a borrower has 20% equity – with FHA it would be on
the loan for 11years minimum and in some cases for the life of the loan. FHA loans are still more forgiving to
borrowers with challenged credit scores and there are some differences in
underwriting requirements as well. So, as always, consult a Loan Officer experienced
in this space to learn if one loan product will fit you better…but in many
cases FHA cannot even be an option since that self-sufficiency rule exists.
Fannie Mae and Freddie Mac have both been charged with
trying to come up with solutions to the affordable housing problem. Needing only 5% down rather than 20% will
help many people looking in this space.
Note that this change is ONLY for Fannie Mae loans currently. So, while
a lender might have you approved for “conventional” financing when you get
prequalified just verify with them that they are qualifying you with Fannie Mae
specifically to get this benefit.
