Reserve Requirements for Multi Financed Properties
Fannie Mae policy changes the reserve requirements for borrowers with multiple financed properties in Desktop Underwriter (DU) Version 10.0 will take effect over the weekend of September 24th, 2016.
The update of Fannie Mae’s underwriting guidelines will simplify the policy that applies to loans for borrowers with multiple financed properties.
The updated policy will require fewer costly eligibility overlays and updated reserve requirements, which will be automated by desktop underwriter. This leaves less room for lender error that may not calculate reserves correctly at the time of application, which reveals itself days from the closing table.
Early release notes state that additional detail on the changes to the multiple financed properties policy will be provided in future underwriting guideline updates.
Fannie Mae Reserve Requirements
Desktop Underwriter (DU) Version 10.0 will use the number of financed properties amount to apply the following eligibility guidelines:
The LTV, CLTV, and HCLTV ratio guidelines, and the limitations on cash-out refinance transactions previously included in the multiple financed properties policy, are being removed.
DU will also determine the reserves required for the other residential financed properties (those that are not the borrower’s principal residence and not the subject property).
The other financed properties reserves amount will be determined by applying a specific percentage to the aggregate of the outstanding unpaid principal balance (UPB) for all mortgages and HELOCs disclosed on the online loan application.
Those percentages are based on the number of financed properties (as determined above):
- 2% of the aggregate UPB if the borrower has 1 to 4 financed properties
- 4% of the aggregate UPB if the borrower has 5 to 6 financed properties
- 6% of the aggregate UPB if the borrower has 7* or more financed properties
*A minimum credit score of 720 is required for borrowers with 7 to 10 financed properties. Borrowers are limited to a maximum of 10 financed properties.
Mortgages and HELOCs listed on the loan application will not be included in the aggregate UPB calculation if the liability is marked paid by close or omitted; or is associated to the subject property, the borrower’s principal residence, or a pending sale or sold property.
DU will also include the unpaid principal balance for any open/active mortgage or HELOC on the credit report that is not disclosed on the loan application. If the loan does not meet the reserve requirements, DU will issue an Ineligible recommendation and a message will be issued letting the lender know the reserve requirement was not met.
Lenders will no longer be required to manually determine the reserve requirements for the borrower’s other financed properties. These reserve requirements will now be determined by Fannie Mae’s desktop underwriter.
Does This Make it Easier to Qualify?
Underwriting guidelines previous to this update used reserve requirements based on a specific number of months or payments as reserves for each investment property. The challenge with using this reserve calculation method is that many investment properties have higher interest rates and payments.
With the new reserve requirements using a percentage of unpaid balances on your investment properties, this will significantly benefit those investors with low balances on investment properties.
The move to use unpaid principal balance as the primary factor in determining reserve requirements is not necessarily a relaxing of the guidelines, however, I think that it will ultimately end up simplifying this calculation, and benefiting many investors that have held those properties for a long time.