Fannie Mae Investment Property Down Payment & Alternative Options
Are you looking for the minimum Fannie Mae investment property down payment or other home loan options for the down payment for a rental property? The minimum down payment for investment property depends on the agency guidelines, credit reputation, capacity, and collateral. There are plenty of investment mortgage options and choosing the right one depends on if you want to close in a Limited Liability Company (LLC), Corporation, or just simply looking for the lowest down payment option.
Minimum Down Payment for Investment Property Factors
The biggest factors that determines the down payment for rental property are determined during the pre-approval process. This depends on the Automated Underwriting System (AUS), which evaluates risk factors. For traditional loans, Loan Originator will run AUS before writing a pre-approval and the underwriter will run AUS again in underwriting.
There is not one single factor, but several that determine your ability or willingness to make a mortgage payment. An underwriter refers to the factors as credit, capacity, and collateral. Even though these play a factor, there are guidelines that state the minimum down payment for investment property.
Fannie Mae Investment Property Down Payment
Depending on the number of units, Fannie Mae’s Standard Eligibility Requirements for an investment property is:
- 1 unit requires a minimum down payment of 15%.
- 2 to 4 units require a minimum of 25% down.
If you are looking for conventional multi-unit financing, Freddie Mac has a minimum down payment option of 5%.
Investment Properties May Require Reserves
In some cases, you may require additional reserves if you have multiple financed properties. This is determined during the pre-approval process when the Loan Originator runs the Desktop Underwriter (DU), which provides a comprehensive credit risk assessment for eligibility requirements.
Some examples of acceptable sources of reserves are:
- Checking and savings accounts.
- Mutual funds.
- Certificates of deposits. Money market.
- Trust account.
- Retirement account.
- Cash value of life insurance policy.
Limits on Number of Financed Properties
Fannie Mae has limits on the number of financed properties, which is 10. There are loan programs that allow an unlimited number of properties financed, which do not take personal debt-to-income ratios as a qualifying factor.
DSR Loan for Investment Properties
The debt-service ratio loan for investment properties have a minimum down payment of 15%. They come with 30 year fixed rates or an adjustable rate mortgage. There is no limit to the number of properties financed and there are blanket loan options available. The advantages of this loan program:
- Option to close in a Limited Liability Company (LLC) or corporation.
- No personal income required.
- Can finance as many properties as you want.
To get the best terms possible, the rent just has to cover the total mortgage payment (principal, interest, taxes, insurance, and home owner’s association dues). There are no ratio loan programs available too.
Freddie Mac Investment Property Down Payment
Freddie Mac also has a minimum down payment for an investment property, which is as follows:
- 15% for 1 unit investment properties.
- 25% for 2 to 4 unit rental properties.
- If you occupy one unit of the units for a 2 to 4 unit property, the minimum down payment option is 5%.
The 5% down payment option on multi-units has income restrictions.
Avoid Mortgage Lender Overlays
Lenders often have internal guidelines on top of Fannie Mae and Freddie Mac guidelines, which can make it harder to qualify for an investment property. This internal guideline is often known as a lender overlay. Some examples of lender overlays include:
- Requiring a larger down payment.
- Requiring a higher credit score.
- Debt-to-income ratio caps.
- Number of properties financed.
- Increased amount of reserve requirements.
- And many more.
Coming Up with the Down Payment for Rental Property
There are creative ways to come up with an investment property down payment that you may not be aware of. A big hurdle in the mortgage industry is sourcing money recently deposited in a bank account. There are documentation requirements for large deposits recently deposited in a bank account in the past two months. Some acceptable sources for a down payment, but not limited to may include:
- Gift funds or gift of equity, but must meet gift guidelines.
- Recent sale of a business.
- Recent sale of a property.
- Borrowed funds secured by an asset – cashing out on a home, automobile, stocks, bonds, 401k accounts, or other assets.
If large deposits are not within the past two months, the money does not need to be sourced. It is important for you to go over recent transactions with your Loan Originator for adequate documentation for sourcing funds.