Fannie Mae makes House Hacking Easier

[Andrew Postell]

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.

Does this apply to 2-4 unit investment properties?

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 on a primary home.

Doesn't FHA already offer a low downpayment option?

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 means 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 at record highs, 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.

Are there any other differences between Fannie Mae and FHA?

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.

Why did Fannie Mae make this change?

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.

Happy hunting!

[Benjamin Sulka]

Andrew, 

This is huge for house hackers. 

It's way more more feasible to get into those larger 3-4 units now and put down only 1.5% more. Additionally, like you mentioned you would have to refi out of FHA to get rid of PMI and the cost of the refi probably wouldn't cost a whole lot less than the different between 3.5% and 5% down!

I wonder how this will impact small multifamily prices. I'd imagine this will increase demand for these assets and ultimately prices. I'd love to hear your thoughts! 

All the best,

Ben

[Jason Sung]

Thanks @Andrew Postell. Does the FHA self-sufficient rule does not apply to duplex?

[Andrew Postell]

@Jason Sung correct! The self-sufficiency rule does not apply to a duplex (nor a single family home with an ADU). It's just for 3-4 unit properties with FHA.

[Andrew Postell]

@Benjamin Sulka yes, I would agree that it would create more demand once the word got out and buyer's realized the benefit.  I would not expect that demand to drive up the price in a crazy way but let's say there's some $700,000 4-unit properties in some markets that are sitting for a long time - those will sell faster.  There's still the elements of 1) there's not a lot of 2-4 unit properties in comparison to SFH and 2) the average family doesn't want to purchase a 2-4 unit property.  Single Family Homes drive the market.  But certainly desirability and demand will be impacted with this loan type being more flexible.

[Benjamin Sulka]

Quote from @Andrew Postell:

@Benjamin Sulka yes, I would agree that it would create more demand once the word got out and buyer's realized the benefit.  I would not expect that demand to drive up the price in a crazy way but let's say there's some $700,000 4-unit properties in some markets that are sitting for a long time - those will sell faster.  There's still the elements of 1) there's not a lot of 2-4 unit properties in comparison to SFH and 2) the average family doesn't want to purchase a 2-4 unit property.  Single Family Homes drive the market.  But certainly desirability and demand will be impacted with this loan type being more flexible.

 Absolutely. Thanks for your response! 

[Andrew T Bolton]

For a house hacker, what is the term requirement for how long one has to live in one of the units before looking for the next deal? Is that a Fanny Mae/FHA thing or based on the lender?

[Anthony Swain]

@Andrew Postell

This was HUGE!!

My wife and I are were struggling to find a small multi family seller that was willing to even consider an FHA offer. We were struggling with finding a way to leverage a low down payment with this strategy. We ended up finding a GEM in one of our favorite locations, but they wanted conventional offers only.

BOOM. The Fannie Mae announcement came out that same week! This allowed us to utilize the low down payment, ability to remove PMI after renovations/gaining equity, and not paying the upfront FHA premium. It was a BIG win for us.

I think you're right, this will help many others considering small MF (2-4 units) as their primary property.

[Jay Hurst]

Quote from @Andrew T Bolton:

For a house hacker, what is the term requirement for how long one has to live in one of the units before looking for the next deal? Is that a Fanny Mae/FHA thing or based on the lender?

1 year for both Fannie and FHA.

[Andrew Postell]

@Anthony Swain awesome to hear!  Glad it came in handy for you.  More and more people are knowing about this product and it will making owning multi-family properties easier for a lot of people.

[Andrew T Bolton]

Quote from @Jay Hurst:

Quote from @Andrew T Bolton:

For a house hacker, what is the term requirement for how long one has to live in one of the units before looking for the next deal? Is that a Fanny Mae/FHA thing or based on the lender?

1 year for both Fannie and FHA.

How does it work if you live in two places. I’m in one state half the year and In another the other half. This is due to my job 

[Andrew Postell]

@Andrew T Bolton since this subject is for a "primary home" this basically this comes down to where you are declaring your residency.  Where is your driver's license, where are your bills sent to, where does your employer pay you your income, etc.  So, if you said, "I currently live in X state and I want to move to Y state"...then your lender would ask you to declare your residency in Y state - and then they would call your employer to make sure they are good with it, etc.   That's the essence of it at least.