Fannie Mae recently announced a significant change to its down payment requirements for multi-family homes. In the coming weeks, the mortgage giant will allow 5% down payments for loans on owner-occupied multi-family houses.
Of course, there are some eligibility requirements. But this rule change presents an opportunity for prospective homebuyers looking to purchase multi-family homes.
Fannie Mae’s new down payment requirements for multi-family homes
In the past, Fannie Mae required down payments between 15 to 20 percent for owner-occupied multi-family houses. But starting the weekend after November 18, 2023, prospective buyers will only need to make a down payment of 5 percent for multi-family homes.
The new option is available for owner-occupied duplexes, triplexes, and quadplexes. As of writing, Fannie Mae has a maximum loan amount of $1,396,800 for properties with two to four units.
The new policy applies to HomeStyle Renovation, HomeReady, no cash-out refinances, and standard purchase loans.
Opportunities for prospective home buyers
A reduced down payment requirement could mean more opportunities for home buyers looking to lower their housing costs or build wealth through a property with income-generating potential. Essentially, this rule change makes it easier for savvy home buyers to pursue multi-unit property opportunities.
For example, let’s say you purchase a home with four units. You can live in one of the units and rent out the other three. The income produced by the three rented units could help to offset the cost of your mortgage payment or even completely offset your housing costs. In addition to offsetting your mortgage payment, you’ll have an opportunity to build equity in the property.
The catch is that you must be comfortable becoming a landlord to the other people living in your building. If you want to build a real estate portfolio, buying a multi-family property as an owner-occupant is a great place to start.
Some call this strategy ‘house hacking.’ Regardless of the label, purchasing a property with multiple units and renting out the extra space generates an extra income stream for the homeowner. As an owner and a landlord, you have a real opportunity to build wealth.
How to decide if a multi-family property is right for you
The dream of homeownership looks different for everyone. But whether or not you’ve been dreaming of a multi-family property, it’s worth taking a closer look at the numbers to determine if this type of homeownership path is right for you.
Start by considering your financial situation. A single-family home might be calling your name. However, choosing a multi-family property could allow for more flexibility in your budget. Depending on your housing market, and the property you purchase, owning a multi-family property could lower your overall housing costs.
For example, let’s say that rent in your market is $1,750 for a two-bedroom apartment. You decide to purchase a four-plex and secure a monthly mortgage payment of $5,000. If you live in one unit and rent the other three, the income from your tenants would more than offset the cost of your mortgage payment. In fact, your tenants would pay a total of $5,250 ($1,750 x 3 units). Ultimately, this means you could get paid to live in your own home.
Of course, the numbers won’t work out positively in every market. But for many prospective homeowners, it’s worthwhile to explore the possibility of purchasing a multi-family unit in your area. It could mean that fewer housing costs are coming out of your budget, which could help you reach other financial goals more quickly.
Keep in mind that this strategy will necessarily mean becoming a landlord, which will require effort and financial preparedness. You’ll have to decide for yourself whether or not it’s worth it for your situation.
How to prepare for homeownership
Buying a home of any kind is a major financial decision. But buying a multi-unit property comes with even more factors to consider.
Use the following strategies to prepare yourself for homeownership:
- Evaluate your savings situation: Since a multi-unit property is a significant purchase, it’s critical to evaluate what the purchase would mean to your savings. In the best case, making a 5 percent down payment wouldn’t completely wipe out your savings. Instead, it’s best to keep an emergency fund on hand as you navigate the new responsibilities.
- Run the numbers: Every housing market is different. Before purchasing a multi-unit property, make sure that the numbers make sense for your situation. Research average rent prices and vacancy rates to avoid overestimating what the building could generate.
- Explore your loan options: Fannie Mae’s loan isn’t the only option for purchasing a multi-unit property with a minimal down payment. FHA loans also allow owner-occupants to make a down payment as low as 3.5 percent to purchase a multi-unit property.
If you are ready to move forward with homeownership, you’ll submit a loan application that details your financial situation.
Fannie Mae 5% Down FAQs
Is 5% down enough for a mortgage?
For a single-family home, 5% is more than enough for a down payment for many home loan options. In the past, a 5% down payment was not enough to purchase a multi-unit property. But Fannie Mae’s recent rule change allows owner-occupants to put down as little as 5% on a property with two to four units.
Does Fannie Mae do multi-family loans?
Yes, Fannie Mae offers multi-family home loans. As of mid-November 2023, owner-occupants can put down as little as 5% on a multi-unit property with two to four units.
The bottom line
The recent change announced by Fannie Mae opens the door for more prospective homeowners to purchase multi-unit properties. A lower down payment could help you secure multi-family property to help you cut your own housing costs and build wealth.