If you typically use conventional loans to finance your investments, take note: Starting April 1, it may get a lot harder. According to a letter sent by Fannie Mae (OTCMKTS: FNMA) to lenders this week, the GSE is delivering a one-two punch to investors, both tightening its lending standards on second home- and investment-backed loans, as well as cutting back purchases of these mortgages overall.
If you’re planning to use a conventional loan in the near future, here’s what you need to know.
What’s happening?
There are two major changes coming down the pike. First, Fannie Mae is cutting back on purchases of these loans, limiting its investment- and second home-backed loan acquisitions to just 7% of its total portfolio.
The company is also focusing on lenders who have “excessive delivery volume” of these types of loans — a move that will undoubtedly decrease the number of conventional loans available for investors.
Fannie has also announced it will tighten its underwriting standards for second-home and investment property purchases. So not only will investment loans be harder to come by; they’ll also get more difficult to qualify for, too.
The new standards will require borrowers to go through the GSE’s Desktop Underwriter (DU) program — a system that automatically assesses a borrower’s qualifications and eligibility. All second home- and investment-backed loans will need to receive an Approve/Eligible recommendation through this program and have their loan delivered as an official DU loan in order to qualify.
Fannie Mae plans to update its eligibility matrix to reflect all these changes next month, but currently, borrowers purchasing one-unit investment properties will need a down payment of at least 15% and a 620 credit score to qualify using the DU program.
The bigger picture
The change is a result of a new agreement between Fannie Mae and the U.S. Treasury, which imposes new risk mitigation rules that Fannie — as well as fellow GSE Freddie Mac (OTCMKTS: FMCC) — must follow.
The new policies will go into effect starting April 1. At that point, any loans that don’t meet the newly tightened standards will be rejected and become unavailable for purchase or delivery into mortgage-backed security pools.
To be clear, when a loan is ineligible for GSE purchase, it forces the originating lender to hold the loan, significantly increasing their risk. Lenders want to avoid this, so these changes are likely to have a big impact on how lenient mortgage companies are willing to be with investors from now on.
What you can do
Fortunately, this doesn’t mean conventional loans are completely out of the question. (It just may be a bit harder to get one than in years past.)
Additionally, conventional loans aren’t your only option for financing an investment property. If you’re unable to get DU-approved, try one of these investor-approved financing sources, or consider strategies for raising capital.
Article originally published on fool.com//Written by Aly J. Yale
