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Breaking Down the New 95% LTV in Fannie Mae 2-4 Unit Guidelines

Updated: Feb 15

Breaking Down the New 95% LTV in Fannie Mae 2-4 Unit Guidelines

Fannie Mae's new guidelines allow for up to 95% Loan-To-Value (LTV) ratios on 2-4 unit owner-occupied properties. This change can seem complex for borrowers given the different property types covered.


But don't worry - our detailed analysis will simplify these updates making them easy to comprehend. Read on as we demystify the world of mortgages and set you up for success!


Key Takeaways


Fannie Mae's new guidelines allow up to 95% Loan-To-Value (LTV) on 2-4 unit owner-occupied properties.


These guidelines include requirements for owner-occupancy, investment properties, and refinancing.


The changes increase the maximum LTV ratio for two-unit properties from 85% to 95%, and for three or four-unit properties from 75% to 95%.


Borrowers can use potential rental income as qualified income when applying for financing.



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Updated Mortgage Eligibility Requirements for 2-4 Unit Properties

Updated Mortgage Eligibility Requirements for 2-4 Unit Properties

The eligibility requirements for 2-4 unit properties include specific down payment requirements, a property eligibility matrix to determine if the property qualifies, and potential exceptions to these requirements.


Down payment requirements


The down payment requirements for Fannie Mae 2-4 unit properties have been updated to allow up to 95% loan-to-value (LTV) ratios. This means that borrowers can now put down as little as 5% of the purchase price or appraised value of the property.


Previously, the maximum LTV ratio for a two-unit property was 85% for owner occupied properties. However, with these new mortgage guidelines, borrowers can access more financing options and potentially become homeowners with a lower upfront cost.


Property eligibility matrix


The property eligibility matrix is a crucial element in understanding Fannie Mae's guidelines for 2-4 unit properties. This matrix outlines the eligibility requirements that properties must meet to qualify for financing under Fannie Mae's guidelines.


Below is a representation of the key changes in the property eligibility matrix related to the maximum allowable loan-to-value (LTV) ratios for two- to four-unit properties.


Property Type

  • Two-unit property

  • Three- or Four-unit property

Occupancy Type

  • Owner-Occupied

Previous Maximum LTV

  • 85%

  • 75%

New Maximum LTV

  • 95%

  • 95%



The property eligibility matrix was updated on November 18, 2024, as part of Fannie Mae's Desktop Underwriter (DU) system changes. These changes aim to expand access to credit and support affordable rental housing. The maximum LTV ratio was increased from 85% to 95% for two-unit properties and from 75% to 95% for three- or four-unit properties. However, it's important to note that these updates will not apply to high-balance mortgage loans and manually underwritten loans.


Exceptions to eligibility requirements


Some exceptions to the eligibility requirements for Fannie Mae's 2-4 unit guidelines exist. While most properties must meet certain criteria, such as down payment requirements and property eligibility, there may be specific situations where borrowers can qualify even if they don't meet all the typical guidelines.


However, it's important to note that these exceptions won't apply to high-balance mortgage loans and manually underwritten loans. So, if you're considering a 2-4 unit property and want to explore your options, ensure you understand the specific eligibility criteria Fannie Mae sets.



Overview of Fannie Mae's Guidelines for 2-4 Unit Properties

Overview of Fannie Mae's Guidelines for 2-4 Unit Properties

Fannie Mae's guidelines for 2-4 unit properties include requirements for owner-occupancy, investment properties, and refinancing.


Owner-occupancy requirements


To get a loan from Fannie Mae for a 2-4 unit home, you must live there. This is called the owner-occupancy rule. If you don't live in one of the units, it's seen as an investment property.


Then, different rules apply to your mortgage. But if it's your home too, Fannie Mae sees less risk with the loan and offers better terms.


Investment Property requirements


For those eyeing a loan under Fannie Mae's guidelines for 2-4 unit properties, it's vital to distinguish between owner-occupied and investment properties. Properties not serving as the borrower's primary residence are termed as investment properties.


These typically carry a higher risk perception for lenders, leading to stricter lending criteria. For instance, a 2-unit investment property has a loan-to-value (LTV) cap of 85%, while for 3-4 unit properties, the limit is 75%. Borrowers might also encounter more stringent credit checks and potentially higher interest rates for these types of loans.


Refinancing guidelines


Fannie Mae made changes to the loan-to-value (LTV) rules. Now, if you want to rate and term refinance (No Cash Out) your two- to four-unit home, you can get up to 95% LTV. This is a big step up from the old rule that set it at 85%.


However this new rule does not work for all loans. If your loan is high-balance or manually underwritten, the old rules still apply. This shift in LTV ratios applies mainly to standard and HomeStyle Renovation programs for refinancing, as well as HomeReady plans.


Financing Options for Adding/Building/Buying an Accessory Dwelling Unit (ADU)

Financing Options for Adding/Building/Buying an Accessory Dwelling Unit (ADU)

Learn about the definition and requirements of an ADU, as well as potential financing options available through Fannie Mae. Discover how you can make your property more lucrative by adding or building an ADU.


Read on to find out more!


ADU definition and requirements


Accessory Dwelling Units (ADUs) are additional living spaces that can be added to or built on a property. These units are sometimes referred to as in-law suites, granny flats, or backyard cottages.


ADUs provide separate and independent housing within an existing property.

When it comes to financing options for adding/building/buying an ADU through Fannie Mae, there are specific requirements to be aware of. The ADU must have its own entrance, cooking facilities, and bathroom facilities.


Additionally, the unit should comply with local zoning laws and building codes.

Fannie Mae offers potential financing options for ADUs through their loan programs. However, it's important to note that each borrower's situation may vary depending on factors such as credit score and income eligibility.


Potential financing options through Fannie Mae


Fannie Mae offers potential financing options for those looking to buy 2-4 unit properties with up to 95% loan-to-value (LTV) ratios. These options include:


HomeReady Program: This program provides an affordable financing option with flexible down payment requirements and lower mortgage insurance premiums. It is designed to help low- to moderate-income borrowers.


Standard Conforming Loan: Borrowers can choose a standard conforming loan, which allows up to 95% LTV for 2-4 unit properties. This option requires a higher credit score and may have stricter eligibility criteria.


HomeStyle Renovation Loan: If you're planning on renovating your investment property, Fannie Mae offers the HomeStyle Renovation loan, which combines the cost of renovations into the mortgage.


Cash-Out Refinance: If you already own a 2-4 unit property, a cash-out refinance allows you to access the equity in your property by refinancing for a higher amount than what you currently owe. The additional funds can be used for various purposes.


Rental Income as Qualified Income: Fannie Mae also allows potential rental income from units in the property to be considered as qualifying income when applying for financing.



Using potential rental income as qualified income


Fannie Mae's guidelines for 2-4 unit properties allow borrowers to use potential rental income as qualified income. This means that if you are planning to rent out one or more units in the property, you can include the expected rental income when determining your ability to qualify for a mortgage.


This can help meet the required debt-to-income ratio and increase your chances of loan approval. However, it's important to note that there are specific requirements and calculations involved in using rental income as qualified income, so it is advisable to work with a lender who is familiar with Fannie Mae guidelines and can guide you through the process accurately.


Qualifying for a mortgage after bankruptcy


If you've gone through bankruptcy, you may still be able to qualify for a mortgage. Fannie Mae's guidelines allow for borrowers who have filed for bankruptcy to apply for a new mortgage after a certain period of time has passed.


The specific waiting period depends on the type of bankruptcy filed and whether it was discharged or dismissed. For Chapter 7 bankruptcy, the waiting period is typically four years from the discharge date, while for Chapter 13 bankruptcy, it can be as little as two years from the discharge date.


It's important to note that during this waiting period, you'll need to work on rebuilding your credit and demonstrating responsible financial behavior. This includes paying bills on time, reducing debts, and saving up for a down payment.


Additionally, lenders will also consider other factors such as your income stability and employment history when evaluating your mortgage application after bankruptcy.



Understanding LTV and Refinance Options Under Fannie Mae 2-4 Unit Guidelines

Understanding LTV and Refinance Options Under Fannie Mae 2-4 Unit Guidelines

Fannie Mae's guidelines for 2-4 unit properties allow for up to a 95% loan-to-value (LTV) ratio.


This means that borrowers can finance up to 95% of the property's value through their mortgage loan.


The LTV ratio is calculated by dividing the loan amount by the appraised value of the property.


Refinancing options under Fannie Mae's guidelines for 2-4 unit properties are available for both owner-occupied and investment properties.


Borrowers can refinance their existing mortgages to take advantage of lower interest rates or access equity in the property through a cash-out refinance.


It's important to note that certain eligibility requirements and underwriting criteria must be met in order to qualify for a refinance under Fannie Mae's guidelines.



How Rental Income and Interest Rate Affect Your Fannie Mae 2-4 Unit Financing

How Rental Income and Interest Rate Affect Your Fannie Mae 2-4 Unit Financing

Rental income and interest rates can have an impact on your financing options for Fannie Mae 2-4 unit properties. When it comes to rental income, lenders will consider a portion of the potential rental income as qualified income, which can help you qualify for a larger loan amount.


This can be beneficial if you are planning to rent out one or more units in the property.


On the other hand, interest rates play a significant role in determining your monthly mortgage payments. Higher interest rates will result in higher monthly payments, while lower interest rates will lower your monthly payments.


It's important to keep this in mind when considering financing options for your 2-4 unit property.


By understanding how rental income and interest rates affect your financing, you can make informed decisions about buying or refinancing a Fannie Mae 2-4 unit property. Keep in mind that each borrower's situation may vary, so it's always best to consult with a mortgage lender who is familiar with Fannie Mae guidelines and can provide personalized advice based on your specific circumstances.



Conclusion

Conclusion

In conclusion, Fannie Mae has updated its guidelines for 2-4 unit properties, allowing for a maximum loan-to-value (LTV) ratio of 95%. These changes offer more flexibility and opportunities for homebuyers looking to invest in multi-unit properties.

It's important to stay informed about these guidelines and work with a knowledgeable lender to make the most of these financing options.


If you are in the state of Florida Bennett Capital Partners can help you with this program. If you are out of the state of Florida we recommend you contact a local independent mortgage broker or lender.


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Common Questions and Answers about Fannie Mae's Guidelines for 2-4 Unit Properties


Are you unsure about how Fannie Mae's guidelines for 2-4 unit properties work? In this section, we answer common questions and provide clarity. Read on to learn more!


What is the difference between a second home and an investment property?


A second home is a property that is primarily used by the borrower for their own personal enjoyment, while an investment property is a property that is purchased with the intention of generating rental income or capital appreciation.


Do these new guidelines apply to both second homes and investment properties?


Yes, these new guidelines apply to both second homes and investment properties. Fannie Mae has introduced these changes to provide more options for borrowers looking to finance a second home or investment property purchase.


Are there any income limits for borrowers looking to take advantage of the new 95% LTV?


No, there are no specific income limits for borrowers looking to take advantage of the new 95% LTV. However, borrowers still need to meet the standard income requirements set by Fannie Mae for their loan application.


What are the reserve requirements for borrowers using the new 95% LTV?


The reserve requirements for borrowers using the new 95% LTV will depend on various factors, such as the number of properties owned by the borrower and their overall financial situation. It is best to consult with a lender to determine the specific reserve requirements for your situation.


Can I refinance my existing loan using the new 95% LTV?


Yes, you can refinance your existing loan using the new 95% LTV, as long as you meet the loan requirements set by Fannie Mae and your lender. It is recommended to speak with a broker at Bennett Capital Partners to discuss your refinance options. They will help you find the best lender for your scenario.


Are there specific credit score requirements for borrowers using the new 95% LTV?


Yes, there are specific credit score requirements for borrowers using the new 95% LTV. Fannie Mae sets certain minimum credit score requirements for conventional mortgages, and lenders may have additional requirements based on their own guidelines.


What is the role of Fannie Mae in these guidelines?


Fannie Mae sets the guidelines for home financing in the United States. These guidelines provide a framework for lenders to follow when underwriting loans. By introducing the new 95% LTV for 2-4 unit properties, Fannie Mae aims to increase homeownership opportunities for borrowers.


Is private mortgage insurance required for loans using the new 95% LTV?


Yes, private mortgage insurance (PMI) is generally required for loans using the new 95% LTV. PMI protects the lender in case the borrower defaults on the loan. The cost of PMI will depend on various factors, such as the borrower's credit score and the loan-to-value ratio.


Can I use the new 95% LTV for a second mortgage?


No, the new 95% LTV is specifically for home purchase or refinance loans. If you are looking for a second mortgage, there may be other loan programs available that cater to this specific need.



FAQs

FAQs

What is the new 95% LTV in Fannie Mae's 2-4 unit guidelines?


The new 95% LTV means that home buyers can get a conventional loan with only 5% down payment for properties up to four units, as long as it is their primary residence.


How does my credit score impact getting a Fannie Mae home loan?


To buy a home using this type of mortgage, your minimum credit score should be at least 620. The requirements are higher if you want an FHA loan or if the property is an investment.


Can I use these guidelines to finance my second home or investment property?


No, Fannie Mae limits this offer to your primary residence only. For second homes and investment properties financing, other conditions apply.


Are there income limits based on the property type under these guidelines?


Yes, lenders may set income limits so you must prove enough gross monthly income to qualify for your desired loan amount.


What happens if I don't meet Fannie Mae’s appraisal needs?


In some cases like rate and term refinance loans, Fannie Mae allows an appraisal waiver but generally requires a fair market value review for most residential properties.


What other special rules do I need to follow when buying more than one-unit with this new guideline?


For multi-unit homes beyond single-family ones including condos; buyers have reserve requirements needing proof of extra money held after closing.



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Philip Bennett

Philip Bennett


Philip is the owner and Licensed Mortgage Broker at Bennett Capital Partners, Bus. NMLS # 2046828. He earned his degree in Accounting and Finance from Binghamton University and holds a Master's Degree in Finance from NOVA Southeastern University. With more than 20 years of experience, Philip has been a leader in the mortgage industry. He has personally originated over $2 billion in residential and commercial mortgages.


Learn more about Philip Bennett's background and experience on our Founder's page. Whether you're a first-time homebuyer or a seasoned real estate investor, our team is here to help you achieve your real estate goals. Don't wait any longer, contact us today and let us help you find the right mortgage for your needs.


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