Supporting Income and Expense Projections

Fannie Mae's operating income statement that you (or the appraiser) must fill out is long and detailed, but both the appraiser and the underwriter review each income and expense item on it before your loan is approved. If an appraiser or underwriter makes adjustments to your projections, most likely he or she lowers the rental income or increases projected expenses. These adjustments reduce the debt service coverage ratio and net cash How projections. They may disqualify the loan.

Whenever possible, support your income projections with documentation. Submit copies of leases to support rent projections and utility bills for expenses. Submit prior years' operating statements (“Schedule E” from prior years' tax returns) if they are available. Well-documented projections have fewer adjustments.

Fannie Mae Restrictions for Investor Loans

In addition to tightening up its qualification requirements, Fannie Mae has increased the amount of down payment that you must make to purchase an investment property. •

• Owner-occupied properties – Minimum 10-percent down payment for two-unit properties (90 percent LTV), and 20 percent for three- to four-unit properties (80 percent LTV)

• Non-owner-occupied properties – Minimum 25-percent down payment (75 percent LTV)

For borrowers with very good credit scores, Fannie Mae allows higher LTV ratios for both owner-occupied and non-owner-occupied investment properties. Have your lender submit your application to Fannie Mae's Desktop Underwriter automated underwriting system.

Note: The previous examples used Fannie Mae's minimum down payments. Other lenders are willing to make investor loans with smaller down payment requirements.

• Limited “cash out” refinance loans – Fannie Mae limits the amount of cash that you take out of a refinancing transaction on investor loans. You can increase your loan amount to pay off your old mortgage, cover closing costs, and pay off second mortgages and lines of credit, but you can put 1 percent of the new loan amount into your pocket. The new loan is still limited to 70-percent LTV for non-owner- occupied properties and 75 percent for owner-occupied properties.

• No ARM loans

• No temporary buydowns

These restrictions, plus a maximum loan-to-value ratio of 70 percent and a limited cash out provision for refinances, substantially reduce investors' flexibility Two major advantages of investing in real estate are leverage and tax shelter. The 70-percent maximum LTV ratio reduces leverage, and the limited cash out restriction for refinancing makes it difficult for an investor to liquidate an investment without selling the property and incurring capital gains tax and sales costs.

• Maximum of five mortgaged units – Some investors buy as many properties as their incomes allow. Fannie Mae now limits a borrower to five mortgaged properties. Properties may include any combination of single-family, second homes, or one- to four-unit properties that are financed. Under this restriction, you could have no more than four investment properties plus your residence that are financed through any lender.

FHA Guidelines

The FIIA no longer insures mortgages on non-owner-occupied properties. It still insures mortgages on owner-occupied two- to four-unit properties. The maximum mortgage amounts, which change annually, are as follows (for 2006)*:

Number of Units

Low Cost Areas

High Cost Areas










*The up-to-date limits are available on the Internet (see Appendix L). In areas of the country with lower housing costs, the maximum FHA mortgage amounts are lower than these amounts.

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