How to Take Advantage of multiple Fannie/Freddie Mortgages?
Investor · Gilbert, AZ · Member since 2020 · 16 posts · 0 votes
On the lastest Bigger Pockets podcast (#383), Josiah Smelser mentioned that between him and his partner and their spouses, they had access for 40 Fannie/Freddie mortgages.
I looked into this strategy, seems that in order to qualify for a Fannie/Freddie loan, you need to occupy the property for 1 year.
How is Josiah getting around that?
Hey Zack,
Great question - it's all a bit confusing to start with but in a nutshell:
FHA Loans are the ones that you have to live in for a year - they are provided by FHA Approved lenders and backed by the Federal Housing Administration insurance . They are a product designed (nowadays anyway) to help lower income Americans, who have a lower down-payment access the housing market and support the economy. Their down payment amounts are as low as 3.5% but they require mortgage insurance to be paid for the life of the mortgage if you provide less than 10% down. They have specific guidelines like you can't use them for investment properties - at least not at the outset - it is perfectly legal to rent a property out that you originally bought with an FHA loan but only after you have been resident for a year and they check that you are fulfilling the residency stipulation. You can then go on to secure another FHA loan whilst still owning a property with an existing owner occupant FHA loan but there has to be a specific reason to request a new FHA product - like you have had to move for your job or you have an extra child and need another bedroom etc.
A conventional loan, a product provided by a general mortgage market lender like a bank or a credit union etc. will provide you with a mortgage which, once set up can then be sold to Fannie Mae or Freddie Mac who pool them together and sell them as Mortgage Backed Securities ( MBS) and other products like CDOs but don't mention CDOs on this site - it gives us all the heebie-jeebies because CDOs contributed to the crash in 2007/8.
These conventional loans can be offered with down payments as low as 3% but they require mortgage insurance (PMI) to be paid with the mortgage until you reach 20% equity in your property. You can use these loans as investment loans but if you apply for the loan as an investment the lender will typically require that you pay 20% or more often 25% if you're new to investing.
People get round this by house-hacking - that is living in the house first and renting out portions of the house. Each product will have different residency requirement and it may not be a full year so that is what you would need to check before structuring a strategy.
You can have up to 10 mortgage products before lenders start getting uncomfortable so in principle if you house-hack your way through your first 10 triplexes you could get all of them on low rate, low down payment mortgages.
Hope that helps.
*edit: episode 382.5!
You're thinking FHA- Fannie/Freddie back conventional mortgages too. They also could be talking about portfolio loans, which can be long term financing structured like a conventional loan.
@Corby Goade - they were talking about it in the context of being limited to 10 per person (but getting around it to a limit of 40 when they factor in their partnership and their spouses).
Does a 10 per person limit apply for conventional loans as well? I thought that only applied to Freddie/Fannie mortgages
@Zack DeRose Fannie/Freddie loans Are what are referred to as Conventional loans. You Can get a low down payment Conventional loan (3-5%) as an owner occupant which require you to live there for st least one year.
You can also get Conventional loans, up to 10 mortgaged properties per borrower, for investment properties with 25% down payments.
@Zack DeRose Fannie and Freddie loans are the definition of conventional mortgages. Anything else would be portfolio, PML or HML. A conventional loan that isn't Fannie or Freddie backed is simply a portfolio loan- similar payment terms and approval criteria, but typically a bit more expensive.
Hey Zack,
Great question - it's all a bit confusing to start with but in a nutshell:
FHA Loans are the ones that you have to live in for a year - they are provided by FHA Approved lenders and backed by the Federal Housing Administration insurance . They are a product designed (nowadays anyway) to help lower income Americans, who have a lower down-payment access the housing market and support the economy. Their down payment amounts are as low as 3.5% but they require mortgage insurance to be paid for the life of the mortgage if you provide less than 10% down. They have specific guidelines like you can't use them for investment properties - at least not at the outset - it is perfectly legal to rent a property out that you originally bought with an FHA loan but only after you have been resident for a year and they check that you are fulfilling the residency stipulation. You can then go on to secure another FHA loan whilst still owning a property with an existing owner occupant FHA loan but there has to be a specific reason to request a new FHA product - like you have had to move for your job or you have an extra child and need another bedroom etc.
A conventional loan, a product provided by a general mortgage market lender like a bank or a credit union etc. will provide you with a mortgage which, once set up can then be sold to Fannie Mae or Freddie Mac who pool them together and sell them as Mortgage Backed Securities ( MBS) and other products like CDOs but don't mention CDOs on this site - it gives us all the heebie-jeebies because CDOs contributed to the crash in 2007/8.
These conventional loans can be offered with down payments as low as 3% but they require mortgage insurance (PMI) to be paid with the mortgage until you reach 20% equity in your property. You can use these loans as investment loans but if you apply for the loan as an investment the lender will typically require that you pay 20% or more often 25% if you're new to investing.
People get round this by house-hacking - that is living in the house first and renting out portions of the house. Each product will have different residency requirement and it may not be a full year so that is what you would need to check before structuring a strategy.
You can have up to 10 mortgage products before lenders start getting uncomfortable so in principle if you house-hack your way through your first 10 triplexes you could get all of them on low rate, low down payment mortgages.
Hope that helps.
Thanks @Corby Goade and @Jed Haslam-Walker - appreciate the info and your time!
Concerning the limits of mortgages that you can get, when I got my personal loan for my house, the loan was limited by my salary - I couldn't take out more than 3x my yearly salary.
I'm curious, if I pursue loans for investment properties, will that 3x yearly salary rule come into play as a limit for the total amount of loans I can take out?
@Zack DeRose, yes- that's typically the limiting factor as investors get started- you'll see it referred to as "debt to income ratio" or DTI. Whe you buy a rental, you'll have to own it for two tax cycles before a lender will give you ANY credit for the rental income it produces, and after that, you'll only get 75% of the credit for that income. You definitely have to get creative to continue to grow.
If you buy a house-hack you will need to use your own income to verify it even if you plan to rent it because it is an owner occupied product.
If you buy with an investment loan product you can use the income predicted on the property but only 75% of the income will be allowed as income verification so for example:
You are buying your second investment property and the mortgage payment is $2000 per month. You house-hacked the first one and your cashflow from it is $500.
The income from the 2nd property is $2000 per month. they will use 75% of your income prediction so $1500 towards the verification of the mortgage amount - your salary or other income would need to make up the other $500.
Let's take that example a bit further..you want to use your income from your first house-hack as the extra $500 make-up amount - they will only allow you to use that income from your first house-hack if they can see it on your tax return - sometimes as @Corby Goade said for 2 years but some lenders will accept 1 year in my experience.
In addition they will require about a year's worth of experience as a property lessor or full time work in the Real Estate industry as experience as part of their underwriting protocol.
Good to know. To clarify, a 'tax cycle' is 1 calendar year, correct?
My brother and I own an LLC that we are putting our properties under. Can I personally take out a conventional mortgage/refinance against one of the houses our LLC owns? Or does the fact that the house belongs to an LLC limit us to a portfolio loan?
Hi @Zack DeRose, @Jed Haslam-Walker and @Corby Goade has provided some really great info, but I'd like to chime in and possibly add some clarification for your original post.
In the podcast, Josiah Smelser indicated that he has access to 40 Fannie/Freddie mortgages, and not 40 doors. There is a difference here. House hacking would allow you to access for up to 40 doors on 10 mortgages, assuming each property is a 4-plex. I believe that what Josiah was referencing was that each individual can hold up to 10 conventional mortgages. If Josiah and wife qualify for their mortgages individually and not jointly, then Josiah can have 10 mortgages, his wife can have 10 mortgages, and the partner couple can have access to a combined 20 of their own mortgages resulting in a total of 40. This, of course, requires you to make enough money to offset all of the PITIA (principal, interest, tax, insurance, HOA dues) on your own and not jointly with their spouse as many people do. I suppose in theory, if all of those 40 mortgages were 4-plexes then they would be able to hold 160 doors combined, but that would be (1) an underwriting nightmare, (2) require massive down payment funds, and (3) take a very long time to do. I figure that most people would prefer to get some experience under their belt and then venture into commercial properties (5+ units to a single property) or figure out a way to get into multifamily partnerships.
Also, 2-4 unit mortgages are allowed on conventional products and not just FHA products. You typically will need a greater down payment to do this. In either case, you should be able to use 75% of the income generated from the "other" units to offset your mortgage even for qualification purposes for your loan. However, if it is your first purchase and you do not have rental experience listed on your tax return (you only need one year of tax returns, not two - two years follows the old guideline), then your income will need to be sufficient to offset the full PITIA on the purchasing property.
If you want to refinance your property held in LLC, you will typically be required to fund the loan holding title in your personal name, and then will need to deed it back into the LLC after close. Your title company can help with you with that paperwork - it's minimal paperwork that needs to be filed and recorded. Even before COVID, it was tough to find a non-QM lender that was willing to fund your loan held in an LLC for title, but with most non-QM lenders gone (most of them literally stopped funding loans last month), you will be hard pressed to find a lender in the current environment that will allow you to keep your home in LLC at funding.
Good luck with your investing!
@Gina Kim
I listened to that episode too — thank you for the insights! I am currently under contract on my first rental property, a duplex in Belton, MO. I live in Brooklyn, NY, so I’m investing out of state. I am already formulating a plan for how to acquire my second property.
For property #1, I took out a conventional residential mortgage loan, 30-year fixed rate with 25% down. No LLC. Based on what I've read from you and @Jed Haslam-Walker :
1) When would I be eligible to apply for another loan in my name? I'm planning to apply for an FHA loan on a multifamily (preferably a 4-plex) and will live in one of the units.
2) Would you recommend that I hire someone to do my taxes after my first investment property?
Thank you for sharing!
@Nina Granberry Hi Nina,
Congratulations! Good job on the first purchase :)
If you bought your first purchase as an owner occupier - am assuming you did from your description - you would need to check your lender's residency requirements that will be what limits you - normally it's a year.
If the product that you are using for your first purchase is an investment loan you could apply for an owner occupier FHA immediately and as long as you could qualify based on your own income you would have no impediments theoretically. You would however need to be able to carry the mortgage for the first and the second property on your own income because once you own your first rental property you have to prove the rent as income after a year on your tax return before they will consider it.
The fact that you are buying with an owner occupier mortgage means you will have to fulfill your individual lender's requirements for you to be resident in your new purchase for the length they specify - if you do not it is considered occupancy fraud.
So again it's the 2 limiters...residency requirement and income verification..
@Nina Granberry Hi Nina,
Congratulations! Good job on the first purchase :)
If you bought your first purchase as an owner occupier - am assuming you did from your description - you would need to check your lender's residency requirements that will be what limits you - normally it's a year.
If the product that you are using for your first purchase is an investment loan you could apply for an owner occupier FHA immediately and as long as you could qualify based on your own income you would have no impediments theoretically. You would however need to be able to carry the mortgage for the first and the second property on your own income because once you own your first rental property you have to prove the rent as income after a year on your tax return before they will consider it.
The fact that you are buying with an owner occupier mortgage means you will have to fulfill your individual lender's requirements for you to be resident in your new purchase for the length they specify - if you do not it is considered occupancy fraud.
So again it's the 2 limiters...residency requirement and income verification..
No, I do not occupy the property. It already has tenants, though. I plan to live in the next property.
Hey @Nina Granberry, you will be able to purchase another property immediately since the first property was purchased out of state (implying an investment property). Since you are only occupying your second property, you can take out a loan immediately, but you will be subject to qualifying for the full carrying costs of both properties.
Regarding taxes, I have some clients who prepare their own taxes since they are comfortable with tax law and their taxes aren't overly complicated, but I think that the majority of my clients with large real estate portfolios tend to hire a tax preparer. It all comes down to how well versed you are with the tax code. There is nothing wrong with doing your own taxes, but there is the chance that you may be missing out on some tax deductions that you may not have known you'd be eligible for.
One thing to keep in mind: I also get a lot of clients who come to me for a loan thinking that they will easily qualify for their next investment property. I notice that most times that the first year an investment property is listed on a tax return, there is a massive net loss to income (at least on the tax return) due to repairs and upgrades that are completed after purchasing. Your property may cash flow and generate good passive income for you, but since the tax code is favorable to real estate investors, you may be losing money on paper, making it more difficult for you to qualify for your next purchase.
Congratulations on your first purchase and glad to hear that you are already thinking of your second!
@Zack DeRose Fannie is 4, Freddie is 10, but there’s easy way to go beyond that.
@Justin Messer Fannie Mae allows up to 10 financed properties when underwriting a loan for a second home or investment property. For a principal residence underwritten by DU and is NOT a HomeReady loan, there is no limit to the number of financed properties by a borrower.
Wow thanks for all the thoughtful responses all! It's been very difficult figuring out the 'rules'/'mechanics' of financing so getting your feedback is awesome!
@Gina Kim - I wanted to go back to your previous message regarding financing with an LLC.
Our first house (cash) is in the process of closing now, with the name of our LLC on the title. From what I understood from your message, we are unable to get a QM if the title has the LLC's name on it.
However, if we are looking to refinance this house down the line, we can work around this by putting the title in my name. We could then get a conventional mortgage in my name for 75% of our property's value.
Finally, after we finish the refinance, we can move the title for the house back into the name of the LLC.
Is there any risk that our mortgage holder will back out if we transfer back to the LLC here? Any time limits before we can refinance or can we do this ASAP? How long does the refinance process last? Am I exposed to more liability if my name is still on the mortgage?
Thanks again v much for taking the time to respond!!
@Zack DeRose the entire topic of deeding title from your personal name into LLC can be a hairy one because of one of the things you mentioned yourself - the "due on sale" clause.
Each loan has some form of due on sale clause which basically says that the bank can call the loan upon transfer of ownership of the property. From the lender's perspective, it's because the loan may be taken out under Zack DeRose's name, but the property itself is now owned by Investments LLC. If a tenant tries to sue you and you run the liability through Investments LLC, the property used as collateral for the loan against yourself may be worthless to the bank. Generally, if you call up a bank and ask if they'd be ok with you deeding the home to your LLC, it'll be a hard no for that reason and I'm sure a ton of other reasons their legal team can come up with.
There also could be some issues with your title insurance depending on how you setup the LLC and your share of ownership in it, but those particulars would be best left answered by a title officer.
But from a practical point of view, if the bank is getting their mortgage payments each month, are they really going to care if Investments LLC is the new owner of the home? If they call your loan and mandate that you must pay the balance in full and that doesn't happen, will a bank really want to shell out thousands of dollars (probably more like tens of thousands) to foreclose on your home? Realistically, I doubt it. I have clients that are determined to do it, and they do it all the time and I have never once been notified that their loan was called. Some deed to their LLC the very next day after the loan closes, and others will do it whenever they please. I've also never heard a client receive push back from escrow or title when they request that a deed be prepared to claim title in LLC post close.
I think the funny thing is that this LLC issue seems to create some controversy between different groups, but I don't think I've ever heard anyone pondering over the legal ramifications of a seller financed home purchase. I'd argue that it's worse in the scenario of a seller financed loan for the bank - the bank still owns the mortgage collateralized against a home that is now owned by a completely different individual, and is also now being paid for by this random stranger. At least in your scenario, the owner of the LLC is also the borrower of the mortgage that was qualified by the bank and granted the mortgage to begin with. But I digress..
There are a lot of fine print/legal that comes with getting a mortgage - I mean, the loan docs are going to be about 100 pages of legal documents. At the end of the day, I think it all comes down to your appetite for risk. Would you rather risk the bank calling your loan, or would you rather keep your investment under your personal name? What are the chances that the bank will call your loan, and what are the chances that your tenant will try to sue you over something? Would it be sufficient to take out a very large insurance policy to protect you against any potential lawsuit from a tenant in lieu of an LLC? Those questions may be best answered with a consult from an attorney on these options.