Fannie Mae's Dying Act: Maximum Property Restrictions for Real Estate Investors

For owners of investment properties, the mortgage market has just become uglier.

In its last act as a semi-private company, Fannie Mae updated its lending guidelines Friday, this time slapping new restrictions and additional fees on income-producing properties.

Most noticeable is Fannie Mae's new, 4-property limitation. They followed in the same footprints of Freddie Mac, who instituted the policy a couple of months back.

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.

However, 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's a good idea for mortgage approval reasons, too.

The other change from Fannie Mae does not have a loophole. It's 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 home's value, 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.

Now, long-term, it's unclear whether the government's Fannie/Freddie takeover will lead to a reversal in the mortgage guideline tightening we've seen this year, but it's sure done a good job in bringing mortgage rates down.

However, as owners of investment properties are finding out, low rates only matter if you can qualify for them.