Fannie Mae Investor Loan Update By Chris Anderson, PhD At Isnare.com Ezine Articles

We have been asked recently for some clarifications on the recent changes from Fannie Mae on Reserve Requirements when purchasing Investment Properties. As you may know, Fannie Mae has repeatedly changed its guidelines on this topic. Staying on top of this information is key as a real estate investor.

The reserve requirement is the additional amount of money that a lender is going to want to see to support the investment property in case their is a shortfall in rental income. Obviously for the lender, the more the merrier but for the investor, it just requires them to have more cash on hand. Essentially, the total amount of cash on hand will consist of 1) the down payment, 2) the reserve requirement, and 3) the closing costs to complete the transaction.

Per Fannie Mae's February 6th Announcement:

When the borrower will own one to four financed properties (including the subject property) the reserve requirements are:

* two months of reserves on the subject property if it is a second home,
* six months of reserves on the subject property if it is an investment property, and
* two months of reserves on each other financed second home or investment property.

When the borrower will own five to ten financed properties (including the subject property) the reserve requirements are:
* two months of reserves on the subject property if it is a second home,
* six months of reserves on the subject property if it is an investment property, and
* six months of reserves on each other financed second home or investment property.

Note: The reserves calculation for a financed property is based on the monthly housing expense of the financed property. All reserve requirements are based on the new definition of reserves as defined in more detail in Fannie Mae Announcement 09-02.

So just as a numerical example, let's say you want to finance an investment property costing $100,000 that will result in payments of $1,000 per month. Then your cash requirements will be:

1. 20% Down (typically): $20,000
2. 6 Months Reserve: $ 6,000
3. Closing costs: $ 2,500 (estimated).

In this example, then lender would be looking for $28,500 in your accounts to get approval.

Notice that these reserve requirements now take into account reserve requirements for other properties if you own too many. This is Fannie Mae's attempt at trying to avoid the bad situation that investors got into in 2005-2007. Simply too many financed properties to recover if payments from rents stopped or dropped.

Obviously, this says nothing about what happens to that reserve cash immediately after closing but it probably is a step in the right direction. While this will not be welcome news for investors that like to use a lot of leverage, it is probably a very prudent step.

You can click here for your copy of the announcement, or you can get it from:

https://www.efanniemae.com/sf/guides/ssg/annltrs/pdf/2009/0902.pdf

Hopefully this helps clear things up for those of you confused on the new Fannie Mae Reserve guidelines for investors.

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