Thinking of purchasing a rental home? Be sure to research the financing options that are available, including conforming and non-conforming loans.
Conforming Loans & Their Limits
Conforming loans are mortgages that meet the funding criteria of Freddie Mac and Fannie Mae, two government-sponsored entities that drive the market for home loans in the United States. Conforming loans have set limits that are adjusted each year, as required by The Housing and Economic Recovery Act (HERA). Conforming loan lenders must abide by these limits when offering conforming loan products to borrowers.
As of this writing, the Federal Housing Finance Agency (FHFA) has set the maximum conforming loan limits for mortgages to be acquired by Fannie Mae and Freddie Mac to $484,350 for a one-unit property. This is an increase from $453,100 in 2018.
For homes that are in high-cost areas, the limit is higher. According to the FHFA, in areas in which 115 percent of the local median home value exceeds the baseline conforming loan limit, the maximum loan limit will be higher than the baseline limit.
“Median home values generally increased in high-cost areas in 2018, driving up the maximum loan limits in many areas,” FHFA stated in their official press release. The new loan limit in most high-cost areas is $726,525–or 150 percent of the baseline limit of $484,350.
Financing Beyond Conforming Limits
The loan limits that conforming mortgages must adhere to can make it difficult for borrowers to finance high-cost homes. Investors who are interested in financing rental property that is priced beyond conforming limits will also have difficulty getting a conforming loan. Likewise, conforming mortgages may have other guidelines such as higher minimum credit scores and lower minimum LTV (loan-to-value) ratios.
For example, an investor who wants to purchase a rental home for $600,000 would have to make a down payment of around 20% (at least) to have the loan fall under the conforming limit. However, investors who wish to finance homes beyond conforming limits may be able to find a solution in an alternative (non-conventional) loan program. The Investor Cash Flow Mortgage is an excellent example.
With the Investor Cash Flow Mortgage, borrowers may be able to qualify for loans up to $3,000,000. Furthermore, this loan program is available to borrowers with lower credit scores (down to 580), and there is no employment or income documentation required.
*Rates and guidelines subject to change.
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