Answer: Down payments are a common hurdle for real estate buyers, whether purchasing residential or investment property. Investors are seen as riskier than owner-occupants and the result is that lenders typically want larger down payments than they require from owner-occupants. But – as we shall see – things may be changing.
Using larger down payments to offset risk seems inherently sensible. If investors have more equity then it’s felt that they will be less likely to hand in the keys if times get tough. However, there is some evidence that bigger down payments may not provide more protection than smaller down payments. For instance, a 2014 study from the Urban Institute found that default rates for loans with 3-5% down and 5-10% percent were essentially similar.
Surprisingly, the higher rates seen in the past two years have not led to increased loan defaults. For instance, CoreLogic reported that the mortgage delinquency rate in June 2023 was 2.6%, .3% below a year earlier when interest rates were about 1% lower.
The story was different with credit scores. Borrowers with scores of 750 and above had far fewer defaults than borrowers with scores between 700 and 750.
So, what does any of this have to do with small investors?
While residential buyers can get financing with zero down (with VA & USDA loans), 3% down from HomeReady (Fannie Mae) and Home Possible (Freddie Mac) financing, and 3.5% down (FHA), investors are looking at down payment requirements that often amount to 15% or 25%.
Now Fannie Mae has come up with something different. It’s offering to buy investment property loans from local lenders with just 5% down.
- The property can have two to four units.
- The investor must occupy one of the units as a prime residence.
- Loans are available to purchase or refinance with 5% down.
- With refinancing, as much as 2% of the new loan or $2,000, whichever is less, can go back to the borrower at closing.
There are other requirements and standards. For details speak with local loan officers.
Will the new Fannie Mae program help small real estate investors, those with just a few units?
The answer is likely to be yes.
First, you have to believe that Fannie Mae did not move to lower down payment standards without extensive study, including a review of the millions of residential and investor loans it originates each year.
Second, it will not be surprising to see other programs emerge with similar underwriting standards. More financial choices mean more competition and perhaps better rates for small investors.
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