What To Do When Your Bank Won’t Finance More Than 4 Properties

Even Though Fannie Mae Allows It

Dan Green

In February 2009, Fannie Mae rescinded a rule that kept real estate investors from financing more than 4 properties at a time. The move increased the maximum properties financed limit to 10, giving investors a ticket to the nation’s REO and Foreclosure Party.

In its widely-celebrated official announcement, Fannie Mae said upping the financed-property limit could stabilize housing nationwide.

“Experienced investors play a key role in the housing recovery”, it noted.

3 months later, however, the 5-to-10 Properties Financed program is proving to be a bust. Despite Fannie Mae’s explicit endorsement of investor loans — mortgage lenders are choosing to keep the investor-friendly program off their books.

Well, most of them anyway.

Although the 5-to-10 Financed Properties program is approved by Fannie Maelenders, only a select crowd of mortgage lenders are making it available. This is a cause for consternation among the real estate investor set. Long-standing relationships don’t seem to count for much when a bank won’t do investor loans as a matter of policy.

And it’s silly, really. Fannie Mae is agreeing to buy the loans; the banks should be willing to do them.

Fannie Mae’s guidelines are pretty clear. The national group will purchase and guarantee investor mortgages where the applicant meets the following criteria:

  • Owns between 5-10 residential properties with financing attached
  • Makes a 25 percent downpayment on the property; 30 percent for 2-4 unit
  • Minimum credit score of 720
  • No mortgage lates within the last 12 months on any mortgage
  • No bankruptcies or foreclosures in the last 7 years
  • 2 years of tax returns showing rental income from all rental properties
  • 6 months of PITI reserves on each of the financed properties

And then, as a last step to reduce fraud, Fannie Mae’s 10-financed property program requires applicants to sign a 4506-T — a form giving lenders permission to verify the submitted-with-the-loan tax returns against the official, IRS-filed version of the same.

So, why don’t all bank participate in the 5-to-10 Properties Financed program?

The probable answer is that underwriting a 5-property-owning investor’s mortgage application is hard work. Versus a traditional homeowner that needs just a basic W-2 and paystub for an approval, a bona fide real estate investor submits complex tax returns with far more details to reconcile and verify.

The time to underwrite a non-owner-occupied mortgage application is multiples bigger than to underwrite a primary residence one. And because the bank gets paid the same amount by Fannie Mae on both loans, it only makes sense that the banks are sticking to what’s most profitable for them.

Less work, same profit. You know which way the banks will go on that one.

But, remember — there are banks participating Fannie Mae’s 5-10 Properties Financed program . If you have between 5 and 10 properties financed and want to purchase a new home, or refinance an existing one, let your first call be to your loan officer or bank. Ask them for help. Then, if that call comes up empty, call or email me directly.

Earthquake Insurance

Many people think that their homeowner’s policy protects them against earthquake damage, but most standard homeowners, mobile home owners, condominium, and renters insurance policies do not; instead, it must be purchased separately. By law, insurers must offer earthquake coverage to their policyholders, through the California Earthquake Authority (CEA). The cost runs approximately $4 per thousand of coverage, and typically has a 15% deductible.
There are government disaster-relief programs available, but they are intended more so to help you start getting back on your feet, not necessarily to rebuild your home and replace personal items lost in an earthquake. It is important to protect your home from earthquake damage because for most of us, it is our biggest financial asset.

Personal Property Coverage (Coverage C)

Personal Property coverage protects many items in the typical home, including furniture, TVs, audio and video equipment, household appliances, bedding, and clothing.

A base policy provides up to $5,000 to replace personal property, but you can increase your Personal Property coverage to as much as $100,000.

Dwelling Coverage (Coverage A)

Dwelling coverage helps protect the investment you have made in your home. It will help pay to repair or, (up to the policy limit) replace, an insured home when structural damage exceeds the policy deductible. You may select a 10% or 15% deductible for your Dwelling coverage.

The insured value of your home, as stated on the declarations page of your companion homeowners insurance policy, determines the Dwelling-coverage limit of your CEA earthquake policy. If your home’s insured value changes in your homeowners policy, the insured value for your earthquake coverage will change, too, and that will affect your earthquake-policy premium.

Personal Property Coverage: Increased-Limit Options
$5,000 $25,000 $50,000 $75,000 $100,000

Additional Living Expense/Loss of Use Coverage (Coverage D)

If damage from an earthquake prevents you from living in your home, your CEA policy may pay for necessary increases in living expenses you incur to maintain your normal standard of living.CEA Additional Living Expense/Loss of Use coverage on a property you own and rent to tenants can help protect your rental income, to the limit of that coverage.A base policy provides $1,500 of Additional Living Expense coverage or you can increase that coverage to as much as $15,000.

Additional Living Expense Coverage: Increased-Limit Options
$5,000 $10,000 $15,000

Additional Coverages

Limited Building Code Upgrade

In most California communities, repairing or rebuilding a home after an earthquake must be done according to current building codes. In addition to providing funds for repairing or replacing your home, the CEA base policy includes an additional $10,000 in Building Code Upgrade coverage.

Option to Increase Building Code Upgrade Coverage

For policies that renew or become effective on or after July 1, 2006, homeowners can choose to increase Building Code Upgrade coverage by an additional $10,000, for a total Building Code Upgrade coverage limit of $20,000.

Items Not Covered

Dwelling-Related Items

Your CEA policy excludes some items from dwelling coverage. A partial list of items that are not covered includes:

  • Detached garages and most other structures that are not part of the dwelling
  • Land damage (other than $10,000 in coverage for land stabilization)
  • Swimming pools and spas
  • Awnings and patio coverings
  • Fences, landscaping, and irrigation systems
  • Antennas and satellite dishes
  • Patios and decks
  • Walkways and driveways not needed for pedestrian or disabled access to your home
  • Certain decorative or artistic items such as mirrors, chandeliers, stained glass, or mosaics

Personal Property

A partial list of personal property items not covered by your CEA policy includes:

  • Animals, birds, or fish
  • Artwork, photographs, and ceramics
  • Motor vehicles (such as cars, trucks, and motorcycles), riding lawn mowers, trailers, golf carts, and watercraft
  • Glassware, crystal, porcelain, and china
  • Spas and hot tubs

Your CEA policy contains exclusions and special limits of coverage—read the entire policy to become familiar with what is and is not covered. If you still have questions about your CEA policy after reading the information on our Web site, please contact your insurance agent or your homeowners insurance company.

Coverage Sublimits

Sublimits – Dwelling Coverage

Once damage to your dwelling has exceeded your CEA policy’s deductible, the policy covers reasonable emergency repairs in an amount up to 5% of the insured value of the home as part of the dwelling limit of insurance.

As part of the dwelling limit of insurance, your CEA policy will pay up to $10,000, including engineering costs, to replace, rebuild, stabilize, or otherwise restore land you own that is necssary to support your home. The policy does not provide any other coverage for land.If your dwelling has one or more chimneys damaged by an earthquake, your CEA policy includes a single sublimit of $5,000 to repair or replace all dwelling chimneys.

Sublimits – Personal Property Coverage

Personal Property coverage sublimits include the following:

  • $1,000 for damage to electronic data-processing equipment such as computers and printers
  • $250 for money, bank notes, coins, and medals
  • $300 for business property

Your CEA policy contains exclusions and special limits of coverage—read the entire policy to become familiar with what is and is not covered. If you still have questions about your CEA policy after reading the information on our Web site, please contact your insurance agent or your homeowners insurance company.

My name is Dennis Dellinges, born and raised in San Francisco and have been a Farmers agent for over 30 years. If you should have any questions regarding this or any insurance matters, please feel free to contact my office, 415-585-2700.

For more information about earthquake insurance visit www.earthquakeauthority.com.