A 3%-down rental property loan? How to use Fannie & Freddie loans for investing

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A few years back, Fannie Mae and its brother lender Freddie Mac launched loan programs called HomeReady and Home Possible, respectively. Their purpose? To compete with the 3.5% down FHA loan program and help low- to moderate-income borrowers buy a home without much cash.

Which is great news for anyone looking to buy real estate with almost no money down.

Why? Because the constraint for most real estate investors is cold, hard cash.

But investors who don’t mind living in the property for a year can take advantage of 3-5% down loan programs from Fannie, Freddie, and the FHA.

Key Takeaways:

    • Investors can buy single-family homes with 3% down and two-to-four-unit homes with 5% down, but must live in the property for at least one year.
    • After one year, they can move out and keep the property as a non-owner-occupied rental property.
    • You can use the future rents from other units to help you qualify for the mortgage.

Fannie Mae Now Allows 5% Down on Multifamily

It costs hundreds of thousands of dollars to buy an “average” investment property. Even when investors use an investment property loan to cover 80-90% of the purchase price, that still might mean coming up with $50,000. For a single investment property.

But what about homeowner loans, that finance 95%, 97%, even 100% of the purchase price? Can real estate investors ever use homeowner loans to invest in rental properties?

In late 2023, Fannie Mae revamped its rules to finance up to 95% LTV for multifamily properties with up to four units. The change applies to standard purchases, no-cash-out refinances, HomeReady, and HomeStyle Renovation loans.

That means buyers can put down just 5% on duplexes, triplexes, and fourplexes, with purchase prices up to $1,396,800. To meet the homeownership requirement, you must live in one of the units for at least one year. After that, you can move out and keep the property as an income property.

In short, Fannie and Freddie’s programs are ideal for multifamily house hacking.

Overview of Fannie Mae’s HomeReady Loan Program

HomeReady is designed to help lower-income homebuyers with minimal cash to buy a home.

It doesn’t have to be their first home, and it doesn’t have to be a purchase loan – refinances are allowed.

The minimum credit score for a HomeReady mortgage loan is 620. Which is generously low, but not as low as FHA’s minimum credit scores (580 for a 3.5% down payment, 500 for a 10% down payment).

Only owner-occupied properties are eligible, but we’ll talk more about that in a moment.

Here’s where it gets a bit sticky for real estate investors. To qualify for a HomeReady property loan, Fannie Mae and Freddie Mac do impose income limitations in some areas.

In many neighborhoods and land tracts, there are no borrower income ceilings. In others, they’re based on the local area median income (AMI). You can check specific neighborhoods’ income ceilings for HomeReady loans here.

It’s a bit strange: “You must have enough income to pay us back, but not more than the local average income!” Many homebuyers and house hackers find it a delicate line to walk.

If you’re a landlord already, you can use your rental income to help you qualify for a HomeReady loan.

As a final perk, parents and other non-occupants can co-sign on HomeReady loans to help borrowers qualify.

Previously, Fannie Mae required minimum down payments of 15-25% for multifamily properties, but that changed as of November 2023.

Freddie Mac’s Home Possible Loan Program

Freddie Mac launched a similar loan program called Home Possible. The program has two options for financing properties: one with a 5% down payment and another with a 3% down payment.

For the 3% down option, a difference from Fannie’s HomeReady program is that the minimum credit score is a bit higher at 640. But the 5% down option allows borrowers with no credit history – a huge boon for many people who have not yet established their credit.

Like Fannie Mae’s programs, the 5%-down Home Possible loan program allows 2-4-unit properties.

Wondering why you might consider Freddie Mac’s Home Possible program over FHA’s 3.5%-down loans?

Because of two other nice perks of both Freddie Mac’s Home Possible and Fannie Mae’s HomeReady loan programs. First, they don’t require lifelong mortgage insurance, unlike FHA’s new lending rules. Once the loan balance drops below 80% of the property value, borrowers can ask their lender to remove the mortgage insurance.

The other advantage to the Home Possible loan program is that it allows flexibility on where the down payment comes from. Freddie Mac allows family members to contribute, employer contributions, and more. That definitely helps when you want to buy a property with no money down (at least none of your own money)!

How to Use Fannie Mae & Freddie Mac Loans for Rental Properties

The HomeReady and Home Possible loans don’t allow for non-owner-occupied investment properties. So how can real estate investors take advantage of these outstanding low-down-payment loan programs?

Easy: you live in the property for at least a year. You could live there by yourself as a typical homeowner, then move out after a year and keep the property as a rental. But if you do that, you don’t get to live for free by house hacking.

House Hacking: Low-Down Payment Financing to Live for Free

I love house hacking. In many ways, it’s the perfect way to buy your first rental property with no money down (or at least minimal money down).

Here’s how the traditional house hacking model works: You buy a small multifamily property (2-4 units), move into one of the units, and rent out the other(s).

There are several huge advantages to house hacking. First, you get to use homeowner financing, which is significantly cheaper (lower interest rates, lower closing costs) than rental property financing. Even more importantly, homeowner financing requires a far lower down payment.

Like, for example, a 3% down payment!

Another advantage to house hacking? Your neighboring tenants’ rent payments cover your mortgage. If you do it well, their rental income also covers expenses like repairs, vacancies, property management costs, etc.

In other words, you get to live for free. Hence the name house hacking! (Want more juicy details? Here’s a detailed house hacking case study of how one 20-something with no real estate investing experience lives for free in a duplex.)

One final advantage of house hacking is that it’s easier to manage rental units when you live at the property yourself. Think of it as property management training wheels.

Get creative and look for ways to buy your first rental property with no money down (or at least very little).

House Hacking a Single-Family Home

Don’t like the idea of buying a multifamily property? Don’t sweat it – you can still house hack.

One option is to create an income suite: a separate section of the property that you can rent out, either long-term or short-term as an Airbnb landlord.

Is your property not very “segment-able”? You could rent out rooms to housemates. Or rent out rooms on Airbnb.

Or, for that matter, you could build or add an accessory dwelling unit (ADU).

Another option? Deni Supplee (the co-founder of SparkRental) found a unique way to house hack her suburban single-family home. As empty nesters, she and her husband Jerry had plenty of space and no one to fill it. They brought in a foreign exchange student, who has not only breathed new life into their home, but the exchange student placement service pays them a hefty monthly stipend. (If you want more information about the service she used, message us using the Chat button at the bottom right and we’ll connect you with them!)

The Live-In Flip

House hacking is a fantastic way to finance and buy your first investment property. But it’s not the only way.

Investing in rental properties isn’t always easy to afford with a standard investment property loan. So, when some real estate investors first start out, with little cash for a down payment, how do they finance their first few properties?

By living in them for a time.

One approach is to move into a property that needs cosmetic updating, spend the next year updating it while you live there, then selling it for a profit and doing it all over again. Or stay for two years, to take advantage of the 121 exclusion (homeowner exclusion) and avoid paying capital gains taxes.

But who says you have to sell it? What if you kept it as a rental property?

The problem with rental property loans is that they typically require at least 20% down. And when you’re first starting out buying investment properties, a 20% down payment can seem unreachable.

But a 3% down payment, through a program like HomeReady or Home Possible? That’s a lot more doable.

As a final thought, bear in mind that Fannie Mae’s HomeStyle Renovation loans allow multifamily properties with up to four units, with a 5% down payment. You can renovate a multifamily while house hacking to combine several strategies.

Comparing Fannie & Freddie Loan Terms to Landlord Loans

Wondering how house hacking loans through Fannie Mae and Freddie Mac stack up against typical landlord loans?

Here’s a quick breakdown. Keep in mind that for owner-occupied loans through Fannie and Freddie, you have to actually move in for at least a year!

Conventional Mortgage Lenders Kiavi (formerly LendingHome) Visio RCN Capital New Silver LendingOne Lendency Conventus
Where to Check Rates Try Credible Kiavi Rates Visio Rates RCN Capital Rates New Silver Rates LendingOne Rates Lendency Rates Conventus
Loan to Value (LTV) 80-97% owner-occ, 75-80% rentals Up to 80% Up to 80% Up to 80% Up to 80% Up to 80% Up to 80% Up to 80%
Credit Score 580+ 660+ (no hard credit pull) 680+ 660+ 680+ (no hard credit pull) 680+ 660+ 620+
Debt-to-Income Ratio (DTI) 28% – 36% No income docs required No income docs required No income docs required No income docs required No income docs required No income docs required No income docs required
Cash Reserve Requirements 6-12 mos.’ payments None 6 mos.’ payments 9 mos.’ payments 6 mos.’ payments 6 mos.’ payments 6-12 mos.’ payments 3-6 mos.’ payments
Min. Interest Rate 6.50-8.625%+ owner-occ, 7.49-9.49%+ rentals 7.9%+ 7.97%+ 7.99%+ 7.95%+ 6.25%+ 6.375%+ 7.375%+
Repayment Term 15 or 30 Years 3/1 ARM, 5/1 ARM, 7/1 ARM, 30-year fixed, or interest-only 5/1 ARM, 7/1 ARM, or 30-year fixed 3/1 ARM, 5/1 ARM, 7/1 ARM, 30-year fixed, or 5- or 10-year interest-only 30-year fixed 5/1 ARM, 7/1 ARM, or 30-year fixed 5/1 ARM, 7/1 ARM, 10/1 ARM, or 30-year fixed 30-year fixed
Time to Funding 30-60 Days 10-30 Days 21-30 Days 14-21 Days 5 Business Days 10-30 Days 20-30 Days 30-45 Days
Loan Limits $50,000 – $726,200 (higher in some markets) $75,000 – $2M $75,000 – $2M $55,000 – $2M $100,000 – $2M $75,000 – $2M $55,000 – $2M $150,000 – $9 million
Prepayment Penalties Varies by lender; as high as 5% within 1 year 3% first year, 2% second year, 1% third year, none after 3 years 3, 5, or 7-year options, including a 3-year step-down pre-payment penalty option 0-5 year prepayment options 3 or 5 year options 80% of 6 months’ interest within first 3 years 2, 3 or 5 year options 3 Year Stepdown (3-2-1%)
States Serviced Credible is licensed in all except: HI, MO, NV AL, AR, AZ, CA, CO, CT, DC, FL, GA, IL, IN, KS, KY, MA, MD, MI, MN, MO, NC, NJ, NV, NY, OH, OK, OR, PA, SC, TN, TX, VA, WA, WI & WV All Except: AK, DE, ID, MN, ND, NE, NV, OR, RI, SD, UT, VT All Except: AK, HI, NV, ND, SD & VT All Except: AK, AZ, CA, CO, DC, ID, MN, NV, ND, OR, SD, UT & VT All Except: AK, NV, ND, SD & UT All Except: AK, AZ, CA, ID, MN, NC, ND, NV, OR, RI, SD, TN, UT, VA,VT All except: AZ, DC, MN, MT, ND, NV, SD, VT & UT
Report to Credit Bureaus? Yes No No No No No No No
Where to Apply Try Credible Kiavi (no hard credit pull) Visio Lending RCN Capital New Silver LendingOne Lendency Conventus

Conventional Investment Property Loans vs. Homeowner Loans

After extolling the virtues of house hacking, live-in flips, and other techniques for buying investment properties with homeowner financing, what are some of the other options available for investment property loans?

The first and most obvious option is conventional investment property financing. You simply call up your regular mortgage broker and ask them about their investment property loan programs.

Conventional investment property loans have their pros and cons. The biggest advantage? They tend to be priced reasonably.

Disadvantages include a slow, tedious underwriting process, stiff income requirements, and they report on your credit report.

“Brian why is that a problem? I’m not a deadbeat, I’m going to pay the mortgage on time!”

Here’s the thing about conventional investment property lenders, and homeowner lenders, for that matter: they’ll stop lending to you if you have more than a few mortgages on your credit report.

That means you have a ceiling of around three or four mortgages before you’re no longer eligible for conventional investment property financing. This is why people can only pull the old “Borrow an FHA or HomeReady mortgage, move in for a year, then move out and keep it as a rental” trick a few times before it stops working.

Other Options for Rental Property Loans

Luckily, nowadays there are excellent online investment property loans available, crowdfunding loans for investment properties, and more hard money lenders than ever before.

Check out our comparison chart of rental property loans and fix-and-flip loans, to view pricing and lending terms side-by-side.

We’ve found that online-only lenders do a particularly good job with rental property loans. Landlords can borrow a 30-year fixed mortgage, at rates equivalent to (or only slightly higher) than conventional investment property loans.

Real estate investors who specialize in flipping have even more good options. Check out the investment property loan comparison chart for a breakdown of several options.

Are HomeReady & Home Possible Loans Feasible as Investment Property Loans?

Yes, with some caveats.

First, investors must be prepared to move into the property for at least a year. If you’re looking for a straight investment property, you’ll need to look elsewhere (see our investment property loan comparison chart).

Second, buyers’ income must be in the “Goldilocks zone” – high enough to qualify for the loan, but below the local median.

Third, the loans will appear on borrowers’ credit reports. That means you will only be able to borrow a few times from government-backed or conventional lenders before hitting their mortgage loan ceiling.

Read: these Fannie and Freddie loans are not scalable in the long-term for real estate investors.

With all that said, HomeReady and Home Possible loans have some strong perks. One excellent advantage over FHA loans is that they don’t require mortgage insurance for the life of the loan: when the loan balance drops below 80% of the property value, borrowers can apply to have mortgage insurance removed.

Another perk? The low down payment required, between 3-5%. And Home Possible has particularly flexible requirements on where the down payment comes from.

Any investors considering an FHA loan for house hacking or a live-in flip should talk to their loan officer about HomeReady and Home Possible loans to compare the terms. Qualifying borrowers may find lower interest rates, lower down payments, or other advantageous loan terms compared to conventional and FHA loans.

Happy real estate investing!

*Credible Disclosure: Prequalified rates are based on the information you provide and a soft credit inquiry. Receiving prequalified rates does not guarantee that the Lender will extend you an offer of credit. You are not yet approved for a loan or a specific rate. All credit decisions, including loan approval, if any, are determined by Lenders, in their sole discretion. Rates and terms are subject to change without notice. Rates from Lenders may differ from prequalified rates due to factors which may include, but are not limited to: (i) changes in your personal credit circumstances; (ii) additional information in your hard credit pull and/or additional information you provide (or are unable to provide) to the Lender during the underwriting process; and/or (iii) changes in APRs (e.g., an increase in the rate index between the time of prequalification and the time of application or loan closing. (Or, if the loan option is a variable rate loan, then the interest rate index used to set the APR is subject to increases or decreases at any time). Lenders reserve the right to change or withdraw the prequalified rates at any time.
Credible Operations, Inc. NMLS# 1681276, “Credible.” Not available in all states. www.nmlsconsumeraccess.org.

About the Author

G. Brian Davis is a real estate investor and cofounder of SparkRental who spends 10 months of the year in South America. His mission: to help 5,000 people reach financial independence with passive income from real estate.

This article originally appeared on SparkRental and was syndicated by MediaFeed.

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