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Buying investment property and second home

July 9th, 2021 9:56 AM by Sam Kader

In case if you have not heard – buying a second home or an investment property became more expensive starting 4/1/2021.  

Federal Housing Finance Agency (FHFA) – Fannie’s and Freddie’s conservator recently announced on March 10th 2021 that they are limiting loans that they are purchasing to 7% of the overall loans they purchase secured by second homes or investment properties effective April 1st 2021.   

How does it affect you? While FHFA did not add any new “Loan Level Pricing Adjustments or LLPA” some lenders are already adding substantial costs to these loans. For example – PennyMac immediately added a 2.250% points to new 2nd home mortgages across the board. Investment properties with less than 25% equity rose to 5 points.  In addition to other lender pricing adjustments such as credit scores, property type, equity and loan purpose. As a reminder Fannie/Freddie also added a 0.50% cost to all refinances over $125K last fall as the pandemic increased defaults and forbearances.  While not every investor raised their pricing adjustments immediately, most will eventually comply by April 1st 2021.  

How lenders define a second home - A property will be classified as a second home if it meets these 4 conditions: 

1) You must live in the house for some part of the year.

2) The home cannot be subject to rental, timeshare or property management agreement. 

3) You must have exclusive control over the property. 

4) The house must be a one-unit dwelling and must be suitable for year-round occupancy. 

Even though there is no distance requirements, you cannot choose a second home close to your primary or else it could be classified as an investment property which carries higher mortgage rates and stricter qualifying guidelines. 

Limits to these types of loans could be problematic since interest in these properties boomed during the pandemic.  Expect to see more cash buyers and far fewer buyers and far fewer bidding wars as the new pricing adjustments raise rates and costs.  Be prepared to pay higher costs or pay cash for that getaway condo or rental property.                                            

Posted by Sam Kader on July 9th, 2021 9:56 AM

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