Do you have several investment properties? Maybe you want to pull equity out of one or more in order to make improvements. An important policy change from Fannie Mae now makes this possible for owners of up to 10 properties.
Prior to this change, you couldn’t take cash out under Fannie Mae if you owned five or more properties. This change is exciting because owning more properties means you have the potential to earn more income.
In addition to this, there were some revisions to savings policies that owners of multiple properties will probably want to know about.
Equity and Credit Guidelines
When taking cash out of your property, you should make sure you have enough equity to accomplish your goal after pulling it out. This is something you should consider with any cash-out transaction, but the problem is a bit more acute with investment properties.
Because investment properties represent a higher risk for investors, it’s required that you keep a minimum of 25% of your equity in your investment property when you do a cash-out refinance. For a two-to-four-unit property, the minimum is 30%. It’ll also be higher if you have an adjustable rate mortgage.
If you have seven or more properties, a minimum FICO score of 720 will apply. You can own up to 10 financed properties.
Whether you’re doing a purchase or refinance, if you have multiple properties, Fannie Mae is updating its reserve guidelines. Reserves are the amount of money you would have available to make your mortgage payment if you had a lapse in income for any reason. Reserves are essentially your savings.
The new reserve calculations are easiest to explain if we start with a scenario. The next few sections will then go over how to calculate the amount of reserves necessary to get our hypothetical loan done. You can then apply the math to your situation.
Here’s the setup:
You’re in the process of refinancing your fifth investment property. The loan amount is $75,000 and your monthly payment is $800, including taxes and insurance. You also have your primary home and principal balances on four other investment properties: $43,400, $45,250, $52,500 and $65,000. How much do you need to keep in reserve?
Calculating Reserves on the Property You’re Refinancing
The first thing you need to do is calculate reserves on the property you’re refinancing. This is pretty straightforward. You need six months of the mortgage payment for the new refinance loan, including taxes and insurance. Association fees are also added if there’s a homeowners association for the property being refinanced. Your monthly payment is $800, so your total is $4,800.
Reserves on Unpaid Principal Balances
Because there are bigger risks involved with financing investment properties when you have multiple properties already, Fannie Mae requires that you reserve a certain percentage of your unpaid principal balance on your remaining investment properties and second homes.
The exact percentage of the unpaid balance you have to pay depends on how many mortgages or home equity lines of credit you have. Although you only have to apply the calculation to your other investment properties and a second home if you have one, your primary property is included in the count of your total residential properties.
- 2% of the unpaid principal balance if you have one to four financed properties
- 4% if you have five to six properties
- 6% if you have seven to 10 properties
In our example above, you have a total of six properties. This means you would calculate 4% of the total unpaid principal balance on your other investment properties.
The total balance for each of your other investment properties is $206,150. If we take 4% of that, we get $8,246.
Putting It All Together
If you’ve followed me so far, you’ve done the hard part. The rest is just addition. Adding together the required reserves from the refinance with the required reserves on your existing unpaid principal balances gives you $13,046 in total required reserves.
We’ve just given you a ton of information, but the big things to remember here are that you can now take cash out when you own five to 10 properties and that reserve requirements are changing.
If you’re looking to apply for a mortgage on a second home or your next investment property, you can get started online or call (888) 728-4702.
Still scratching your head? Leave us a comment, and we’ll be happy to answer any questions.
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