If you are planning to obtain a conventional loan to finance a second home or investment property, these changes could affect your loan.
New policies are on the way, which could cause financing that Daytona beachfront vacation home a bit more challenging. Fannie Mae sent out letters to lenders on March 15, 2021 announcing upcoming changes to their lending standards for both second home and investment properties. Not only are the standards for these loans going tighten, but Fannie Mae is also cutting back on purchases of these mortgages overall.
Background: Why are Mortgages Sold?
When a lender, broker or other non-bank lender provides a borrower with a conventional loan, the loan is often sold on the secondary market as part of "mortgage backed securities" (or MBS) to investors. The loan and financial risk are transferred to the investors, freeing up the money and providing the lender with the liquidity to finance a loan for the next borrower. This process provides the necessary liquidity of funds for mortgages, keeping housing affordable for the average homebuyer. MBS's were created in 1938 as an initiative to make housing more accessible. Before its initiation mortgages required down payments of 50% or more, along with strict terms that often allowed the lender to take your home if you missed even ONE payment.
In order for a loan to be eligible for purchase on the secondary market, the loan must be backed by Fannie Mae or Freddie Mac and meet certain requirements. When a loan does NOT meet these requirements, it cannot be purchased. This forces the lender to "hold" the loan. Holding loans increases a lender's financial risk significantly, and limits capital for additional loans. Lenders are looking to keep their financial risk to a minimum and to continue to have the ability to lend, so it key that many of their loans meet the requirements for secondary purchase.
Two critical items: Updated Guidelines to be implemented April 1st, 2021
The new agreement between Fannie Mae and the US Treasury has two components that will have a critical effect on conventional loans going forward. The first is tighter guidelines and the second is limiting the percent of the market share that can be made up by secondary and investment property loans.
What does this mean for you?
New, More restrictive Conventional Loan Requirements
The new loan standards will require that lenders utilize an automated underwriting processes known as Desktop Underwriter. This is a system that automatically evaluates and determines a borrower’s eligibility based on investor guidelines. All investment and second home loans will soon be held to a higher standard of underwriting, and may make it more difficult for people to obtain financing for secondary and investment homes.
The good news: Lenders like to work with low risk borrowers
The new policies don’t mean that conventional loans are completely out of the question for secondary and investment purchases – the odds are just tilted slightly out of your favor. Don't stress! There are things you can do to shift the odds and improve your chances of making the cut. Keep your credit score high, plan to have at least a 15% down payment for investment and 10% for secondary and don't let your DTI (debt to income ratio) creep up. Lenders like working with well-qualified borrowers. Anything you can do to show you are strong candidate financially, and low risk of defaulting can help your chances of finding a conventional loan for your investment or vacation home!
Don’t Delay! Changes will be implemented
Some lenders have started adjusting their prices already in anticipation of these changes, but not all. So if you are about to make a purchase – Call Simplicity Mortgage, or apply today!
Ready to buy and not sure where to start? Call Simplicity Today!
As Mortgage Brokers, we have relationships with MANY different lenders. This allows us access to a wide range of products and programs that will be the best fit for you financially and provide you with the highest level of service. Think of us like your personal mortgage shopper -we analyze all the options to find you the best loan to fit your next purchase, instead of being limited to one bank or lender.
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