In a game-changing move, Fannie Mae has recently announced a significant reduction in down payment requirements for owner-occupied 2-unit, 3-unit, and 4-unit homes. Effective November 18, 2023, the down payment will be just 5%, a substantial decrease from the previous 15-25% requirement for duplexes, triplexes, and four-plexes.
This policy shift presents a golden opportunity for aspiring investors and homeowners seeking to combine the benefits of property investment with the perks of homeownership.
Lowering the down payment barrier provides immediate benefits:
- Buy sooner. Instead of waiting until you’ve saved a 15%-25% down payment, you can start with just 5%.
- Live in one unit, rent the other 1-3 units. Use the rent money to pay the mortgage on the building, as well as the associated costs of taxes, insurance, and upkeep.
- Benefit from growth in the entire property’s value, not just the space you occupy.
2024 San Diego County Fannie Mae & Freddie Mac Conforming Loan Limits (Low-Balance)
| One-Unit Limit | Two-Unit Limit | Three-Unit Limit | Four-Unit Limit |
|---|---|---|---|
| $766,550 | $981,500 | $1,186,350 | $1,474,400 |
Unlocking Affordability and Wealth Creation
The reduced down payment threshold on 2-4-unit properties is a critical enhancement to the guidelines for several reasons:
Increased Affordability: The potential income-generating possibilities of these properties make them an attractive option for younger and prospective homeowners seeking a smart way to build equity and add an additional revenue stream. Offsetting a liability with an income-producing asset is one of the surest ways to build wealth over time.
Expanding Homeownership Opportunities: This policy opens new doors for prospective homeowners seeking to enter the real estate market. Realtors now have new ways to market properties that previously had a limited pool of potential buyers.
Incentivizing New Construction: Builders seeking to expand their portfolio of available new construction products have a new incentive to engage in multifamily developments.
2024 Updated Multi-Unit Primary Residence Home Loan Requirements
| Primary Residence | Min FICO | # of Units | Max LTV/CLTV/HCLTV | Max DTI |
|---|---|---|---|---|
| First-Time Homebuyer Purchase | 620 | 1 | 97% | 50% |
| Purchase and Rate/Term Refinance | 620 | 1 | 95% | 50% |
| 2 - 4 | 95% (2 Unit was 85% 3 - 4 Units was 75%) |
50% | ||
| Cash Out Refinance | 620 | 1 | 80% | 50% |
| 2 - 4 | 75% | 50% | ||
| Note:This change currently applies to Conforming loans only, and does not apply to High-Balance loan amounts. Please see below for High-Balance loan amount requirements. | ||||
| San Diego County 2024 Conforming Loan Limits (Low-Balance) | One-Unit Limit | Two-Unit Limit | Three-Unit Limit | Four-Unit Limit |
|---|---|---|---|---|
| Loan Limit | $766,550 | $981,500 | $1,186,350 | $1,474,400 |
| 5% Down Payment | $38,328 | $49,075 | $59,318 | $73,720 |
| Max Purchase Price | $806,895 | $1,033,158 | $1,248,789 | $1,552,000 |
Benefits Beyond Homeownership
In addition to its impact on homeownership, this policy shift offers several other benefits:
House Hacking: The reduced down payment requirements can help individuals start an investment career through house hacking, a strategy that involves renting out a portion of a property to cover the mortgage payments.
Competition for FHA Loans: This policy could introduce healthy competition to FHA loans, which require a higher down payment of 15%-20%.
Advantage over 203K Loans: As long as Fannie Mae keeps loan-level-price adjustments in line, this policy should give them a competitive edge against 203K loans.
Fannie Mae High Balance Multi-Unit Maximum Loan-to-Value Requirements:
- 15% Minimum Down Payment on a 2 unit-property
- 25% Minimum Down Payment on a 3–4-unit property
| Transaction Type | Number of Units | Maximum LTV, CLTV, HCLTV |
|---|---|---|
| Purchase Limited Cash-Out Refinance |
2 | 85% |
| Purchase Limited Cash-Out Refinance |
3-4 | 75% |
| Cash-Out Refinance | 2-4 | 75% |
Freddie Mac Super-Conforming Multi-Unit Maximum Loan-to-Value Requirements:
- 15% Minimum Down Payment on a 2 unit-property
- 20% Minimum Down Payment on a 3–4-unit property
| Transaction Type | Number of Units | Maximum LTV, CLTV, HCLTV |
|---|---|---|
| Purchase Limited Cash-Out Refinance |
2 | 85% |
| Purchase Limited Cash-Out Refinance |
3-4 | 80% |
| Cash-Out Refinance | 2-4 | 80% |
FHA Multi-Unit Maximum Loan-to-Value Requirements:
- 1-4 units minimum down-payment of 3.5%
- 3-4 units require the establishment of the FHA Self-Sustainability Test which requires 75% of the monthly income from the entire property (existing or market rents) must cover 100% of the entire FHA mortgage payment including principal and interest, property taxes, insurance, and FHA monthly mortgage insurance.
- Borrower’s income cannot supplement any shortage on a 3-4 Unit Property.
- With increased home values and interest rates, it is uncommon for a 3-4 Unit Property to qualify for an FHA loan with a minimum down-payment of 3.5%, but your loan officer can quickly confirm.
- Most frequently buyers target 2- unit properties for an FHA purchase with a 3.5% down-payment as 1-2 Units do not have to fall into the FHA Self Sustainability Test.
VA Multi-Unit Maximum Loan-to-Value Requirements:
VA home loans remain the most flexible loan program to purchase a multi-unit property.
- 100% Financing 1-4 Units there is no purchase price or loan amount limit.
- 6 Months of Payment reserves are required for any buyers purchasing 1-4 Units.
- The Veteran needs to have property management experience or evidence of a relationship with a licensed property manager before closing.
Jumbo Multi-Unit Maximum Loan-to-Value Requirements:
A Jumbo loan is a loan amount that exceeds the county high-balance loan limit for the specific country that the property is located.
Most Jumbo loan programs are going to limit down-payment on multi-units to follow Fannie Mae or Freddie Mac and will require 6-12 months of payment reserves to qualify for the purchase of any multi-family residential property.
Non-QM Multi-Unit Maximum Loan-to-Value Requirements:
A non-QM loan will typically refer to a loan program that falls outside the traditional Fannie, Mae, or Freddie Mac qualification requirements. These loan programs will allow for as little as 15% down-payment on a 1–4-unit property as long as that property is owner-occupied.
Final Thoughts
- Down Payment can be 100% Gifted at Closing.
- Non-Occupant Co-Borrowers allowed.
- 75% of Future Rents (either current or market rate) can be utilized.
It will be interesting to see how multi-unit home prices are affected by these lower down payment requirements. If history is any indication, we should expect to see a steady upward rise in multi-unit home prices in the near future. This move is expected to have a significant impact on the multi-unit housing market, driving up prices and increasing demand.
Approaching a mortgage loan for a multi-unit property for the purposes of living in one of the units and then renting out the other units is different than approaching a loan for a one unit property or a refinance. Many loan officers are not experienced with the nuances related to these types of loans and without that experience you can run into frustrations, delays, and in some situations an inability to finance a property simply because the person you are working with does not have the experience or access to products that will meet your needs.
Our team has a great deal of experience in financing multi-unit properties being used as owner-occupied properties.
