All Forum Posts by: Parker Borofsky

Sorry @Stephanie P. but your interpretation is incorrect.  I triple checked this with underwriting and also a 3rd party we use for guideline interpretation.  Both confirmed that we do not count financed properties for those in which the borrower is not personally obligated on the loan.  I never post on here if I have not at least double checked myself with guidelines.

I understand the Fannie Mae language is confusing, which is why I posted verbatim the Freddie Mac guideline, because they were more evident and easier to understand.  

The purpose of the second bullet point you referenced is to clarify it's the number of properties and not number of mortgages against the properties (i.e. HELOC's/secondary financing).  They left out the word "personally obligated" however, this is written in the first bullet point.

The second bullet point:

• the total number of properties financed, not to the number of mortgages on the property or the number of mortgages sold to Fannie Mae (a multiple unit property counts as one property, such as a two-unit); the borrower’s principal residence if it is financed; and

If you still don't believe me, feel free to send me any clients you have to turn away for max # of financed properties in this situation and I will get them financed!  :)

@Boris Mordkovich

There are some instances you can purchase a second home in the city you live in or close to it.  For example, I have a client who lives in Franklin, TN and purchased a second home downtown Nashville, TN with the intention of using it when conducting business downtown, entertaining clients, etc...  

We don't often ask for explanations for second home unless there is a reason to. 

You would not be able to purchase an LTR as a second home because access would be restricted and the property would be subject to an occupancy agreement limiting use.

Please be careful about listening to advice other than from a licensed loan officer.  We are navigating the guidelines every day and they change constantly.

@Stephanie P. and @Brian G.

Per FNMA Freddie guidelines, the 10 financed property rule only applies to properties in which you are personally obligated on the debt.  Freddie Mac guidelines are written a little more clearly than Fannie's but they are the same when it comes to counting the 10.  (the reserves requirement is a little different for Freddie)

Freddie Mac guideline:

Each Second Home or Investment Property Mortgage must meet the following requirements:
• Each Borrower individually and all Borrowers collectively MUST NOT BE OBLIGATED ON (e.g., Notes, land contracts and/or any other debt or obligation) more than 10 (ten) 1-4 unit financed properties, including the subject property and the Borrower's Primary Residence, provided that, when the number of 1-4 unit financed properties (including the subject property and the Borrower's Primary Residence) is greater than
6 (six), the Mortgage must:
o have a minimum Indicator Score of 720 AND

o 8 months of the monthly payment amount on each additional second home and/or 1-4 unit
Investment Property that is financed and on which the borrower is obligated.

@Brian G. As long as you are not personally obligated on the financing, it is not counted as one of the 10.  The Freddie Mac language is a little more clear than Fannie, but they have the same requirement: (the reserves requirement for Freddie is different than Fannie)

Freddie Mac guideline:

Each Second Home or Investment Property Mortgage must meet the following requirements:
• Each Borrower individually and all Borrowers collectively MUST NOT BE OBLIGATED ON (e.g., Notes, land contracts and/or any other debt or obligation) more than 10 (ten) 1-4 unit financed properties, including the subject property and the Borrower's Primary Residence, provided that, when the number of 1-4 unit financed properties (including the subject property and the Borrower's Primary Residence) is greater than
6 (six), the Mortgage must:
o have a minimum Indicator Score of 720 AND

o 8 months of the monthly payment amount on each additional second home and/or 1-4 unit
Investment Property that is financed and on which the borrower is obligated.

@Jon Lostetter alright - a little late to the party here but hopefully this will help LOL...  Appraisers in the Smokies are well aware of the income potential on cabins and the value they hold and why.  Most appraisals reflect value based on a couple approaches i.e. income approach/sales approach/cost approach however they will hang their hat on the sales comparison approach 99.9% of the time.  

I don't recommend you try too hard to determine if a cabin you like is "worth it" because there are too many variables in the Smokies.  The most difficult one is that many of the cabins have "below grade" sq. footage/bedrooms/bathrooms and above grade sq. footage/bedrooms/bathrooms and you won't be able to tell by comparable listings the sq. ft above/below because they just aren't listed that way.

Additionally, appraisers have to take 82 hours of required coursework and complete 2 years (I believe) as an apprentice.  There are way more factors that go into this than I could even begin to explain.  

All of that being said, if you like a cabin, go for it! By the time you analyze it and try to figure out the value, someone else will have snagged it. If you have an appraisal contingency, you won't end up having to pay more than it would reasonably sell for or it's actual value. If the value was low, you would have the option to terminate the contract, pay the difference, or hopefully the seller would come down to the appraised value. Lately, most appraisals have been coming in slightly over sales price, but I've had a few come in a bit under, and on rare occasion, a few come in way under value. 

Whatever you do, DO NOT TRY TO USE PRICE PER SQUARE FOOT!!  This does not work for many many reasons.

Hope this helps!

Thank you @Avery Carl

@Amit Desai I am a lender and the company I work for follows Fannie Mae guidelines with no overlays when it comes to this topic.  

Fannie Mae's guidelines verbatim are as follows:

Must be occupied by the borrower for some portion of the year

Must be suitable for year round occupancy

Borrower must have exclusive control over the property

Must not be rental property or a timeshare arrangement (this has the following disclaimer in the guidelines:  If the lender identifies rental income from the property, the loan is eligible for delivery as a second home as long as the income is not used for qualifying purposes, and all other requirements for second homes are met (including the occupancy requirement above).

Cannot be subject to any agreements that give a management firm control over the OCCUPANCY of the property

This means that as long as you intend to occupy the property some portion of the year, you could absolutely rent it while you are not using it.  This is why it can work for short term rentals but not long term rentals.

Hope that helps!

@Julie McCoy those were pretty classic!  "what kind of towel service do you offer? We are going to need enough for the three nights we are here" 

I really had to bite my tongue Bahahahaha

@Brandon S. check with your CPA and an atty but @Luke Carl is correct. From my understanding the LLC won't provide the protection that most believe it will and since you can use the QBI tax rule on a schedule E, there may not be a benefit tax-wise either, so double check that. I would recommend a good umbrella poicy regardless.

Small correction to the number of financed properties... you can have up to 10 financed properties to qualify for FNMA. For example, if you have commercial/FHA/VA/private mortgages in your name, it still counts as one of the 10. However, if both the mortgage and the property are in your LLC (okay if you and the LLC secure the mortgage), it does not count as one of the 10.

@Kyle Mccaw My feelings are crushed that you have the opinion that FNMA Freddie Mac are for mostly W2 income. Okay, maybe not crushed LOL. Sounds like you just need to talk to an excellent Loan Officer who knows what they are doing! I would say that easily 45% of my clients are self-employed (some with multiple businesses) and probably 70% of them are heavy investors with multiple rental proeprties. STR/LTR/Commercial etc... and I know the guidelines inside/out and how to calculate the effective income from these. Other LO's or company's may not know how to use projected rental income, I do and we can so I would say be careful swearing off Conventional due to bad experiences with LO's who don't know what they are doing! In fact, just yesterday I spoke to a client who was told he couldn't qualify for anything because they didn't know how to calculate his Schedule E and weren't using projected rental income, and I qualified him for $725K - he was very surprised!

@John Underwood it's actually not the mortgage company but the servicing company that would care about the LLC quitclaim, but it can be doable without having issues. Here is the link to the FNMA guideline for servicers:

https://servicing-guide.fanniemae.com/THE-SERVICING-GUIDE/Part-D-Providing-Solutions-to-a-Borrower/Subpart-D1-Assisting-the-Borrower-with-Property-Related/Chapter-D1-4-Transfers-of-Ownership/Section-D1-4-1-Information-Relating-to-Transfers-of-Owner/D1-4-1-02-Allowable-Exemptions-Due-to-the-Type-of-Transfer/1041300841/D1-4-1-02-Allowable-Exemptions-Due-to-the-Type-of-Transfer-11-08-2017.htm?touchpoint=guide

Here is the language:

Unless the previous borrower requests a release of liability, the servicer must process the following exempt transactions without reviewing or approving the terms of the transfer:

A transfer of the property (or, if the borrower is an inter vivos revocable trust, a transfer of a beneficial interest in the trust) to

• • a limited liability company (LLC), provided that
    • the mortgage loan was purchased or securitized by Fannie Mae on or after June 1, 2016, and
    • the LLC is controlled by the original borrower or the original borrower owns a majority interest in the LLC, and if the transfer results in a permitted change of occupancy type to an investment property, such change does not violate the security instrument (for example, the 12 month occupancy requirement for a principal residence).

    The servicer must notify the borrower that a property transferred to an LLC must be transferred back to a natural person prior to any subsequent refinance application in order to meet Fannie Mae's Selling Guide underwriting requirements.

For a mortgage loan acquired by Fannie Mae after June 1, 2007, if a servicer reasonably believes that a due-on-transfer provision is unenforceable by law or would not be enforced by a court, the servicer is authorized to approve a transfer of an interest in the mortgaged property or a direct or indirect interest in the borrower (if an entity), provided the servicer has notified Fannie Mae’s Legal department (see F-4-03, List of Contacts) of the reason for its belief and Fannie Mae has either sent a notice of non-objection to the proposed transfer or not responded within 60 days of its receipt of the notice.

The servicer must notify the applicable property insurance companies, tax authorities, the mortgage insurer, and any other interested parties when it processes a transfer of ownership.

@Dezmin McCoy  Wow, a lot of opinions on here LOL.  Here are some general Fannie Mae (not lender specific) guidelines.  

1. Fannie Mae/Freddie Mac will not allow Conventional loans to close in the name of an LLC. This is not lender specific and applies to any FHFA backed mortgage per the Fannie/Freddie guidelienes.

2.  If you are purchasing as a vacation home, it truly needs to be a home you will use from time to time for vacationing and you can absolutely use it for overnight rentals when not using it.  If you purchase with 2 other couples then it really kind of turns into a "timeshare" for lack of better word which is not allowable for a Conventional loan.  However, if you purchase as investment property instead, it would meet the occupancy requirements and if you chose to go this route the min down payment for an investment property per FNMA is 15% (not all banks allow it, but these are the actual guidelines).

3. If you must purchase with 2 other couples, I do recommend (as did someone above) choosing one representative from each couple to be on the loan.  At the end of the day, if you all want to be on Title, you can be.  Just remember, if something happens down the road and someone wants to sell, or refinance, etc... ALL 6 of you would have to agree and sign.

4. To address the long-standing question and mythical answers of "can I quit claim into an LLC" the answer is yes, BUT

Unless the previous borrower requests a release of liability, the servicer must process the following exempt transactions without reviewing or approving the terms of the transfer:

a limited liability company (LLC), provided that

• the mortgage loan was purchased or securitized by Fannie Mae on or after June 1, 2016, and
• the LLC is controlled by the original borrower or the original borrower owns a majority interest in the LLC, and if the transfer results in a permitted change of occupancy type to an investment property, such change does not violate the security instrument (for example, the 12 month occupancy requirement for a principal residence).

The servicer must notify the borrower that a property transferred to an LLC must be transferred back to a natural person prior to any subsequent refinance application in order to meet Fannie Mae's Selling Guide underwriting requirements.

Here is where this can be found under Fannie's Guidelines:  

https://servicing-guide.fanniemae.com/THE-SERVICING-GUIDE/Part-D-Providing-Solutions-to-a-Borrower/Subpart-D1-Assisting-the-Borrower-with-Property-Related/Chapter-D1-4-Transfers-of-Ownership/Section-D1-4-1-Information-Relating-to-Transfers-of-Owner/D1-4-1-02-Allowable-Exemptions-Due-to-the-Type-of-Transfer/1041300841/D1-4-1-02-Allowable-Exemptions-Due-to-the-Type-of-Transfer-09-09-2020.htm?touchpoint=guide

And to address the "buying as 3 couples" - I would strongly recommend you not go down this road LOL.  I have worked with many clients who are friends and it can get really rough.  Unless you all have very similar taste/style, think the same way about investing, negotiating, etc... the odds are stacked against you that you would all ever agree enough to even close on a property.  What if a couple of you are more apprehensive but the others are excited?  One of you get's hung up on the fact that a seller won't agree to fix every item on the inspection report, but the rest of you are reasonable and only want major items addressed?  All it takes is one to be stubborn and refuse to sign to mess it up for everyone else.  Only you know the dynamics of your group and I won't say it's never worked, but I will say it's rare.

Hope all of that helps!!

@Michelle Schrader In terms of escrow for potential property income being allowed from a Fannie Mae/Freddie Mac standpoint the answer is a hard no if you are using Conventional financing. That would be a huge inducement to purchase and is not allowed to be considered as part of the sales price. The max allowable seller concessions are 6% of the sales price on a second home with 10% down or 2% of the sales price of an investment occupancy or the actual amount of closing costs and pre-paids, whichever is less. The sellers may not care about what income you will be out of and at this point they may be more concerned with the fact that they have a binding contract with you and depending on their situation, may be relieved that they will be out of this property in 4 weeks. I own 3 STR's and am closing on 2 more next week. My thoughts are that for the next 2 - 3 months, I will be perfectly happy if I can bring in at least enough just to cover expenses - anything additional would be great. I am sure the market will recover at some point (if it doesn't we are all screwed anyway) and I realize for the next 8-24 months, I may not earn quite as much as I would have before this, but anything is better than nothing, and my commitment to investing is for the long-haul and not specifically the immediate return. I always take the "can I live with the worse-case scenario" approach. My absolute worse-case is that these properties will produce $0 for a few months and I will be on the hook to use reserves to cover expenses. If necessary, we can do this for a little bit, and as a lender, I know that there are a lot of provisions being made when people really need the help like forbearance of mortgage payments etc. so I am not overly concerned about losing properties if this lasts longer than expected. The banks/lenders definitely do not want foreclosures because they don't want to deal with having to get rid of millions of homes, so there will be plenty of measures to keep people afloat until this passes. My advice would be to weigh out your worse-case scenario and the future/long term income potential and decide if it's worth it. If you can come up with some kind of income protection agreement with the seller - more power to you!