Effective November 18, 2023, Fannie Mae will accept 5% down payments for owner-occupied multifamily homes.
The major policy shift will unlock new options for borrowers who dream of investing in real estate.
What's in this article?
Read on to learn more about the policy change and how to access the benefits with an experienced mortgage lender.
What is Fannie Mae’s new 5% down payment update?
In an update released in early October of 2023, Fannie Mae announced that the maximum allowable loan-to-value ratios (LTV) for the purchase or refinance of a two- to four-unit principal residence would be updated to 95% (or 5% down).
The updates also extend to the maximum allowable combined loan-to-value ratio (CLTV) and high credit loan-to-value ratio (HCLTV), which are used in scenarios where there are multiple loans on a property.
According to the release notes, the changes were made to “expand access to credit and provide support for affordable rental housing.”
What is LTV?
LTV is a fundamental percentage used in mortgage lending that represents the ratio of the loan amount to the purchase price of the property.
An LTV of 95% means that the loan amount you borrow equals 95% of the property’s purchase price.
For example, if you want to purchase a $300,000 multifamily property under Fannie Mae’s new 95% LTV changes, you could take out a $285,000 loan and be responsible for a 5% down payment of $15,000.
What does owner-occupied mean?
“Owner-occupied” refers to real estate that is used as the primary residence of the owner.
In other words, an owner-occupied property is a place where the property owner lives and resides, as opposed to using the property solely for rental or investment purposes.
To qualify for a loan with 5% down for a two- to four-unit property, you must intend to live on the property in one of the units.
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What were the previous requirements?
Prior to the policy change, Fannie Mae required a down payment of 15% for duplexes and 25% for triplexes and four-plexes.
The higher down payment amount made this option inaccessible for many would-be homeowner-landlords.
For example, if a borrower wanted to purchase a $300,000, three-unit property under the previous requirements, they would have needed to put down 25% of the purchase price, or $75,000.
Comparing the two examples above, a borrower would save $60,000 with Fannie Mae’s new requirements.
Why did Fannie Mae lower the down payment amount?
Fannie Mae did not release a statement on its decision to lower the down payment amount but explained in the release notes that the purpose was to widen access to credit and boost support for affordable rental housing.
Many industry professionals are praising the decision because it will help more homeowners access the lucrative benefits of homeownership along with the potential for generating additional income.
The change is also a major step forward for those looking to invest in real estate and build a diverse investment portfolio.
With the income-generating benefits of a multifamily property, homeowners can more easily build additional savings for future properties and investments.
How you can access the benefits of Fannie Mae’s policy change
To take advantage of Fannie Mae’s policy change, apply for a loan with a reputable, experienced mortgage lender like Compass Mortgage.
Loans backed by government-sponsored enterprises Fannie Mae and Freddie Mac are generally conventional loans.
To qualify for a conventional purchase loan with a 5% down payment for a two- to four-unit property with Compass Mortgage, borrowers must meet the following requirements:
- Owner-occupied, meaning the home must be the borrower’s primary residence
- Credit score of 620 or higher
- Proof of income and employment
- Documentation that confirms a debt-to-income ratio (DTI) of 50% or less
- Down payment of at least 5% for two- to four-unit homes
- Private mortgage insurance (PMI) until owner equity in the property reaches 20%
According to Fannie Mae, loan limits for two- to four-unit properties in 2023 are as follows:
- Two units: $981,500
- Three units: $1,186,350
- Four units: $1,474,400
Loan limits vary by state and also take into account high-cost locations. For example, the loan limit for a four-unit property in Alaska, Hawaii, Guam and the U.S. Virgin Islands is $2,095,200.
Borrowers will also be responsible for paying closing costs and fees, which usually total 2-4% of the loan amount.
What is the difference between conventional and FHA loans for multifamily properties?
Borrowers can also purchase a home with up to four units with an FHA loan.
The minimum down payment amount is 3.5% for credit scores of 580 or more, and 10% for a score as low as 500.
In exchange for the more flexible requirements, borrowers must pay an up-front and annual mortgage insurance premium (MIP).
The basic standard mortgage limits for FHA-insured loans also are generally a bit lower than Fannie Mae and Freddie Mac limits.
The decision between an FHA multi-unit property loan or a conventional loan depends on your unique needs as a borrower. Your lender can help you navigate these decisions based on your personal goals.
Compass Mortgage can help you purchase a multifamily property
If you’re ready to take the next steps in your multifamily investing journey, Get Committed® with Compass Mortgage today!
Get Committed®, our unique loan commitment program, will help you secure the lowest possible interest rate and make your most competitive offer.
Get Committed® provides a fully underwritten loan commitment and locks in your interest rate even before you find the property you want to buy so that you don’t miss out on the home that’s right for you.
A loan commitment essentially has the power of a cash offer, showing the seller you’re fully approved financially and that your deal isn’t likely to fall through.
Get Committed® secures the financing for you and means we can close on your loan in as little as 15 days.
Apply now to supply us with information about the property you’d like to purchase, and we’ll reach out with your personalized loan options.
You also can fill out our contact form to inquire about the loan process or give us a call at (877) 635-9795 to speak to our experienced team now.