In case you missed it, a couple weeks back Freddie Mac announced guideline changes that will dramatically affect many residential real estate investors.
As of August 1st, 2008 the following changes will officially go into effect:
- A borrower may not have more than four financed 1-4 unit properties (including the subject property);
- For cash out refinances the borrower must own the property for at least 6 months prior to refinancing.
If you want the whole scoop right from the horses mouth, feel free to put yourself to sleep with this PDF from Freddie Mac.
What does this mean for investors?
Well current guidelines for Freddie Mac and Fannie Mae say that you can have up to 10 financed properties — a limitation that in and of itself has been an admitted challenge for many “buy and hold” investors to overcome.
So lowering that number now from 10 to 4 only makes the challenge tougher.
But it’s important to note that this only applies to mortgages from lenders who sell their paper to Freddie Mac. It doesn’t mean you can’t get a mortgage on your 5th rental at all — just not from a lender who sells their paper to Freddie Mac.
Currently Freddie Mac and Fannie Mae do not have loan seasoning requirements on investment properties. As of 8/1/08 this changes completely.
The second guideline change will affect investors purchasing properties with hard money loans, lines of credit or cash with the intent of refinancing to pull cash out. Under the new rule an investor will have to wait 6 months before attempting to process a cash out refinance through a Freddie Mac lender.
This means if you’re planning to use a Freddie Mac lender to refi and pull a little cash out of your latest rehab project, then you’d better plan on having your bridge financing in place for at least 6 months prior.
Understand that Fannie Mae and Freddie Mac are for-profit, privately capitalized government-sponsored entities. They purchase the majority of conforming loans, and my understanding is that most all conforming lenders now underwrite pretty strictly to Fannie/Freddie guidelines.
So while this change only effects loans from “Freddie Mac” lenders, it may also trickle down to those who follow their guidelines to a “T”.
So what about Fannie Mae?
She (Fannie Mae) hasn’t shared yet whether she will follow in Freddie’s footsteps and make similar changes. But the word on the street is that Fannie Mae is often seen as the more conservative of the two entities. So don’t be surprised if we hear her singing a familiar tune sometime soon.
If this happens, the watering hole gets a whole lot smaller. Basically it will it be impossible for an investor with 4 financed properties to obtain financing for the purchase of additional properties through any lender conforming to Fannie/Freddie guidelines.
What can be done about these changes?
Personally I don’t think you can do much of anything to reverse/stop them.
Since most lenders have few choices but to sell their loans to Fannie Mae and Freddie Mac on the secondary market, these lenders are stuck following their guidelines for the time being. And rather than complaining about the new system, I say we investors should be be always resourceful in finding new ways to accomplish our goals.
If you already have 4 financed houses in your “hold” inventory and are considering a purchase or refinance anytime soon, I’d suggest you get the process going as soon as possible and try to beat the change deadline if you can.
Your thoughts on this? Will this personally effect your REI business? Your comments welcome below…