Family Opportunity Mortgage vs Investment Loans: Choosing the Right Option for Your Purchase
In this article, we’ll look at the various differences for a Family Opportunity Mortgage vs investment loans.
Many Americans have considered purchasing a home for a loved one. Whether they need safe housing for a parent or an affordable home for a college-age child, purchasing a home for a family member can be difficult, as buyers are often forced to use investment loans.
A Fannie Mae program, known as the Family Opportunity Mortgage (FOM), provides easier access to properties for a loved one, and could also create a more affordable loan.
Is the Family Opportunity Mortgage right for you, or would an investment loan better serve your longterm goals? To help make the decision, let’s start by comparing the Family Opportunity Mortgage vs investment loans.
Comparing the Family Opportunity Mortgage vs Investment Loans
FOM Loan: Must be for specific family members under certain conditions
Investment: Property can be occupied by anyone from the start
With a loan through the FOM program, the property being purchased must be occupied, at least initially, by a parent, a child attending college, or a disabled adult child. There are also requirements for the individual. Essentially, they must be unable to work or have an insufficient income to qualify for a loan on their own.
For an investment loan, you can rent the property to anyone you choose. Yes, this can include a child or parent, but you can also rent the property to tenants whom you are not related to in any way.
FOM Loan: Must meet conforming loan limits
Investment: Can go beyond limits
Because the FOM program is supported by Fannie Mae, it has to meet the limits of a conforming loan. These limits are set on a county-by-county basis, and usually allow for the purchase of a quality home in most areas.
An investment loan can be structured in many different ways, so there are no official limits. However, the larger the loan, the more difficult (and costly) it will be to qualify.
FOM Loan: As low as 5% in most cases
Investment: 10%, as much as 20% in some cases
One of the largest differences for the Family Opportunity Mortgage vs investment loans discussion is the downpayment. In general terms, the higher the risk to the lender, the more of a downpayment will be required. For investment loans, which are some of the highest-risk loans made in the industry, the downpayment requirements can be particularly large, as high as 20% in some cases. For a loan through the FOM program, loans can be secured with as little as 5%.
What difference will this make? If we assume a $500,000 property, an investment loan may call for a downpayment of $100,000 (20%). However, at 5%, the downpayment would only be $25,000.
Debt Ratio Requirements
FOM Loan: As much as 50% debt-to-income
Investment: Varies, likely near 40% to 45%
Lenders have a real interest in making sure their borrowers have manageable debt loads. The lower the debt compared to their income, the better, so investment loans often call for debt-to-income ratios of no more than 45%.
With the FOM program, however, you may be able to secure financing with a DTI as high as 50%. This may not seem like a significant difference, but it could be the difference for loan approval.
FOM Loan: Both yours and family member’s can be used
Investment: Single income, but future rent may be applied
Both of these loan types have advantages for eligible income. Let’s look at FOM first. For these loans, you can actually use two incomes: your own and your family member’s. If your parent or child has an income of any measure, this income can be added to the application in addition to your income. This could significantly increase your buying potential.
But with an investment loan, you may be able to use monthly rental as stated income on the application. Essentially, the future rent checks can be listed as income, helping increase your qualifying amount.
FOM Loan: Location requirements when purchasing for college students
Investment: No location requirements
For the FOM program, there are some requirements for the location and proximity of the home. If you are purchasing for a college student, the property must be within a reasonable distance to the school. However, there appears to be no location requirements when the property is being purchased for a parent or disabled child.
With investment properties, there are fewer restrictions. However, if the property is classified as a 2nd home (and not a pure investment), there are restrictions for how close it can be to your primary residence.
FOM Loan: Generally match primary-residence loans
Investment: Higher rates due to increase lender risk
The Family Opportunity Mortgage program was created to make these purchases as affordable as possible. As such, they come with interest rates that match the relatively low rates of loans on primary homes.
Investment properties, however, often have higher rates. Because they are inherently more risky, lenders add additional interest, which makes these loans financially viable.
FOM Loan: Extensive restrictions on properties
Investment: Almost any property is eligible
Fannie Mae wants to make sure that loans through the FOM program are used to purchases safe, comfortable homes for family members, not manipulated in a way that they are essentially used as hard investment loans. Part of this goal is limiting the types of properties that can be purchased.
For an FOM purchase, single-unit dwellings are the only properties allowed. This means no duplexes or multiunit properties. Fannie Mae also holds that a company may not take over management of the property.
With investment property loans, there are far more options. You can purchase a multiunit property or even a large commercial building. It may be more difficult to secure financing, but you’ll have numerous options for your purchase.
Family Opportunity Mortgage vs Investment Loans: Let Us Help You Decide
Which is right for you? Have you made a decision in the debate between the Family Opportunity Mortgage vs investment loans?
If you need help making the choice, or if you want assistance with your loan application, contact our helpful staff today!