Borrowers entering the real estate market as investors might have a more difficult road ahead.
Fannie Mae is flagging potential risk criteria in a letter to its lenders that outlines new limits on loans for second homes or investment properties.
Lenders are being asked to adhere to a 7% limit on loan acquisitions for the financing of second homes or investment properties. Because the limits will depend on 52-week moving averages, there’s a chance the new policy will impact potential borrowers. The share of these types of loans are already above 7% given the historically low-interest rates. Now, banks are being asked to scale back on this lending.
The 7% guidance is not the only new policy. Lenders will also have to follow certain procedures when issuing investment loans, including underwriting restrictions.
The new policy isn’t fully embraced by everyone. Some leading groups are critical of the limit on acquisition, especially as rates remain low. Investment loans also represent big revenue generators, which some argue are offsetting the risks. Furthermore, they are an incredible financial opportunity to build wealth.
Limiting these loans can skew the rental market as well. Already, investor ownership in smaller-scale multi-family homes accounts for about half of all rental units, including those that provide affordable housing to lower- and moderate-income earners.
The concern is the loan limits can put a strain on the market and limit resources to individuals and businesses hoping to build wealth and earn new cash flows.
Fannie Mae’s policy went into effect at the beginning of April. The company will monitor and check for compliance moving forward. Freddie Mac is expected to announce similar guidelines in the near future as well.
If you have any questions about this change, don’t hesitate to contact us.
