Rental and Vacation Home Loan Changes

Change for Rental and Vacation Home Loans

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Effective immediately,  Fannie Mae and Freddie Mac indirectly increased the rate and/or consumer’s loan fees for 2 types of home loans.   

Rental and Vacation Home Mortgage Rates Increase

Unlike the refi fee surprise last year, Fannie & Freddie issued no specific fee/rate increase.  Instead, this jack in the box surprise caps a lenders proportion of vacation & rental property home loans backed by Fannie or Freddie (aka “the GSE’s”) at 7% of all loan originations.

  • What just happened? Lenders now limited to delivering a max of 7% of all their single family originated loans as vacation & rental home loans to Fannie & Freddie 
  • What loan types are impacted? Conventional purchase & refinance loans for vacation & rental property. 
  • What loan types are NOT impacted? Conventional owner occupied, VA, FHA, USDA and JUMBO loans.
  • What happens when the 7% cap is exceeded? Fannie & Freddie charge fees/penalties charged for the overage.
  • Will lenders exceed the 7% limit?  Yes – typical lender portfolios consist of 10-15% vacation & rental home loans historically prior to today.
  • Who pays the fees/penalties? The consumer pays via higher rates and/or higher closing costs (points).
  • When is this effective? Immediately
  • Is this rate increase permanent? Most likely – no – see below for more.

New Rule Means Instant Fines

Imagine having 2 gallon jugs of water in your hands.  Then, pretend you must hold the jugs with your hands.  You cannot set them down. You may not put them in the fridge.  

Suddenly – a new law passes stating each person can have 1 gallon of water.  The result – everyone is instantly in violation and a full 1 gallon over the limit. Also, no one has time to figure out how to handle extra gallon #2. That is essentially this in a nutshell.

Why the Sudden Rental & Vacation Home Loan Changes?

Whether we like it or not, there is a reason for this. Agree or disagree, knowing the facts helps understand the change.

  • Why is this happening? To “de-risk” Fannie & Freddie’s portfolio and protect the US Treasury’s investment in GSE’s (vacation & rental home loans are more risky than owner occupied – this is why they are the target here). 
  • Who made this happen? The United States Treasury.  They feel 7% is the “safe” amount for vacation & rental home loans.
  • How is US Treasury connected to vacation & rental home loans? In 2008 (part of the housing crash recovery) the US Treasury financially backed Fannie & Freddie. As such, they get to call the shots here. 

Long Term Rate Outlook for Rental & Vacation Home Loans

At present, most lenders already exceed the 7% limit cap.  Additionally, Conventional loans (Fannie & Freddie) are the only conforming loan (loan at or under $548,250) options for vacation & rental home loans.  Presently, – there’s nowhere else to turn for these loans.

Easing Rental & Vacation Mortgage Rates Back Down

  • What helps ease the rate/fee increase? Non-Fannie/Freddie investors opening up product lines allowing for vacation & rental home loans.  Expect this to evolve fast. 
  • How do Non-Fannie/Freddie investors help this? They give lenders another place to deliver vacation & rental home loans.  As a result, interest rates ease because fees & fines for passing the 7% Fannie/Freddie cap decrease.  
  • Why are there no Non-Fannie/Freddie Investors for vacation and rental homes already?  Easiest answer is – there has been no need before today AND there was little opportunity to compete with Fannie and Freddie’s pricing until today.  

The speed and amount at which this new rate/fee increase for vacation & rental home loans eases depends on the following:

  1. How fast Non-Fannie/Freddie investors show up
    There are already non-conforming (JUMBO) options for both vacation & rental home loans in place. These investors need to open their product lines up to Conforming loan amounts now.
  2. Non-Fannie/Freddie investors vacation & rental home products rules 
    Guidelines (such as credit score, loan to value, debt to income, reserves etc…) will determine how much of the 7% excess can be absorbed by non-Fannie/Freddie loan products.
  3. Pricing on Non Fannie/Freddie Conforming vacation & rental home loans
    Non-Fannie/Freddie rates would likely be higher than the “old” Fannie/Freddie rates but lower than the instant hike from today.