There are many misconceptions of the total number of financed properties a Fannie Mae applicant can own. Most believe it is five ( the former limit). In fact, it is ten. But because of requirements layered on each additional property, called “reserves”, and “DTI ratios”, the practical limit is much less.
Reserves. This is how it works. Fannie Mae requires applicants to show liquid reserves to be approved for a residential mortgage. The reserves must be liquid assets, and be seasoned ( documented) for at least two months. For the first primary residential mortgage, the applicant must show reserves equal to one month’s PITI. (This may vary, based on the LTV and credit score, between 0 and 6 months’ of reserves.)
After that it gets more expensive. For a second property ( second home or investment property), the applicant must show a minimum of two months of reserves, plus one month of reserves for the existing primary mortgage, for a total of three months’ reserves. The same two morths’ reserves are added for properties three and four, for a total of seven months of reserves. ( 1+2+2+2).
For months five through ten, add six months of reserves per mortgage, or 36 months of reserves. Add those to the previous seven months, and you have a potential reserve requirement of forty-three months for ten properties. Assuming one month of reserves is $1,000, for the tenth and final mortgage, the applicant must show a total of $43,000 of liquid reserves!
And, if you are thinking of bringing in a co-borrower to help shoulder the load, Fannie Mae requires the co-borrower to account for his/ her investment properties, separately, for the same loan. In effect, Fannie Mae prices out investors of multi- properties. Which is too bad, because its rates and terms are attractive for rental housing formation. If you wish to accumulate many investment properties with debt, you better get acquainted with alternate lenders.
DTI Ratio. This ratio is the percentage of housing debt to total income. For Fannie Mae the maximum percentage ( ratio) is 35%. This, too, can hang up real estate investors of multi properties. If your DTI ratio is too high, you can be cut off from more financing.
The mortgage on your residential home can pose a problem also.
If you have a big mortgage on your primary residence it can negatively affect your ratio, since there is no off setting rental income. Likewise, if you don’t have separate income from a job, your ratio can suffer, especially if rental profits are not robust. If the DTI ratio is not obtainable, you will have to look elsewhere. Like to lenders who make asset-based loans, which do not consider the income of the borrower.