For owners of investment properties, the mortgage market is getting ugly. 

As Fannie Mae was being taken over in September, it updated its lending guidelines.  The new lending guidelines placed severe restrictions on real estate investors and subjected them to additional fees on income-producing properties. 

Fannie Mae's most significant change is its new 4-property limitation. 

Based on the new rules, second home and investment property applications will be denied in underwriting if the mortgage applicant has, or will have, more than 4 properties financed in total. 

The former guidelines allowed for 10 properties.

Loophole for Investors

Fannie Mae has also clarified what it means to "own" a property, creating a loophole for real estate investors. Fannie Mae no longer considers a property "under ownership" if the property is held in the name of a corporation -  even if the borrower is the sole owner of the corporation. 

Real estate investors, therefore, can place their properties into an LLC and not be subject to Fannie Mae's 4-property limit.   Most real estate investors do this already for liability and taxation reasons, but now it is a good idea for mortgage approval reasons, too.

The other change from Fannie Mae does not have a work-around.  It is a set of new, mandatory loan fees, specifically assigned to investment property mortgages.

• Loan-to-value less than 75 percent : 1.75% loan fee
• Loan-to-value 75.01-80.00 percent : 3.00% loan fee
• Loan-to-value 80.01-90.00 percent : 3.75% loan fee

These new charges are separate from, and in addition to, Fannie Mae's already-costly loan-level adjustments.  Add the two together to calculate the total "mortgage fee".

And, lastly, there's the Fannie Mae changes for "Accidental Investors" -- mortgage applicants that couldn't sell their primary residence and, therefore, converted it to a rental.

Fannie Mae's new guidelines restrict owners of converted property from using its rental income on a subsequent mortgage application.  If the converted property's equity is less than 30 percent of the value of the home, the entire monthly housing payment must be shown as a monthly income loss.

If the equity exceeds the 30 percent threshold, owners can use 75 percent of the rental income to qualify, and must also show 6 months worth of housing payments in reserves for both the rental property and the upcoming home purchase in order to qualify.

Long-term, it is unclear whether the takeover of Fannie Mae / Freddie Mac by the government  will reverse the tightening of mortgage guidelines we have seen this year.  The takeover has at least helped reduce mortgage rates.

As owners of investment properties are finding, low rates are only important if you can qualify for them.

Cautions:

• Do you already have 4 mortgaged income-producing properties?
• Are your properties owned / held by an LLC?
• How much equity do you have in each of your properties?

 As always, contact your accountant, CPA, tax or financial advisor to discuss your particular situation and property investment goals.