Freddie Mac Guidelines: Investment Property Mortgages

What Counts as an Investment Property Mortgage

Investment property mortgages cover rental properties you don't live in. This includes single-family homes, duplexes, triplexes, and fourplexes that you plan to rent out.

The property becomes your investment when you buy it specifically to generate rental income. Even if you plan to move into it later, Fannie Mae treats it as an investment property if you're not living there when you close on the loan.

The 10-Property Limit Rule

Fannie Mae caps the total number of financed properties you can own at 10. This includes your primary residence, any second homes, and all investment properties with mortgages.

Say you own your primary home with a mortgage, plus three rental properties with loans. You're at four financed properties. You can buy six more investment properties before hitting the limit.

The count includes any property where you're personally obligated on the debt. If you co-signed on your adult child's mortgage, that counts toward your 10. Land contracts and seller financing also count if your name is on the obligation.

Some properties don't count toward the limit. Commercial buildings with five or more units, undeveloped land, timeshares, and manufactured homes not titled as real estate are excluded. Properties owned by your business or trust don't count either, as long as you're not personally liable for the debt.

Credit Score Requirements Get Stricter

Once you own more than six financed properties, Fannie Mae requires a minimum 720 credit score for any new investment property loan. This applies to all borrowers on the loan.

If you're married and buying together, both of your scores must meet the requirement. The lender uses the lowest middle score among all borrowers, so one spouse with a 715 score would disqualify the loan even if the other has an 800 score.

Cash Reserve Requirements

Investment property loans require substantial cash reserves after closing. You must have enough liquid assets to cover 2-6 months of mortgage payments on the new property, depending on your overall financial picture.

The exact reserve requirement depends on your credit score, debt-to-income ratio, and how many properties you already own. A borrower with excellent credit buying their first rental might need two months of reserves. Someone with marginal credit buying their fifth investment property could need six months.

Acceptable reserves include checking accounts, savings accounts, money market accounts, and certificates of deposit. Retirement accounts like 401(k)s count, but only 70% of the vested balance. Stocks and mutual funds count at 70% of their current value.

Where Your Money Must Come From

All funds for the down payment, closing costs, and reserves must come from your personal accounts. Business accounts, even if you own the business, are not acceptable sources.

Pooled investment funds are specifically prohibited. You cannot use money from investment partnerships, real estate investment trusts, or similar pooled arrangements to qualify for the loan.

Gift funds from family members are allowed, following standard gift fund rules. The donor must provide a gift letter stating the funds don't need to be repaid, and you'll need documentation showing the money's source and transfer.

How Rental Income Gets Calculated

Lenders can use projected rental income from the investment property to help you qualify for the loan. The calculation follows specific rules outlined in Fannie Mae's rental income guidelines [[5306.1]].

For existing rental properties in your portfolio, lenders use your actual rental income from tax returns and lease agreements. For the property you're buying, they'll use a market rent analysis or existing lease if the property is already rented.

The lender typically counts 75% of the gross rental income toward your qualifying income. The 25% reduction accounts for vacancy periods and maintenance costs.

Your Primary Residence Still Matters

Even though you're buying an investment property, your current housing payment affects your debt-to-income ratio. The lender includes your primary residence mortgage payment when calculating your monthly obligations.

This means you need enough income to support both your current housing costs and the new investment property loan. Many borrowers underestimate this requirement and find they don't qualify despite having rental income from the new property.

Loan Type Restrictions

Investment property mortgages must be standard fixed-rate loans or specific adjustable-rate mortgages. Fannie Mae accepts 7/6-month and 10/6-month ARMs, which have fixed rates for the first 7 or 10 years respectively.

Temporary buydown mortgages are not eligible. These loans start with below-market rates that increase over time, often funded by seller concessions or developer incentives.

Special Rules for New Construction

If you're buying a newly built investment property, you cannot have any business relationship with the builder, developer, or seller. This includes employment relationships or ownership interests in their companies.

The rule prevents potential conflicts of interest and ensures arm's-length transactions. Even indirect relationships through family members or business partners could disqualify the loan.

Documentation Requirements

Investment property loans require extensive documentation beyond standard mortgage paperwork. You'll need tax returns showing rental income from existing properties, lease agreements for current rentals, and property management agreements if applicable.

The lender will also require a rent schedule or market analysis for the property you're buying. This document establishes the expected rental income used in your qualification calculations.

Bank statements must show the source of your down payment and reserves going back several months. Large deposits require explanation and documentation of their source.

Common Complications

The 10-property limit catches many experienced investors off guard. Properties you co-signed for family members count toward your total, even if you don't live there or collect rent.

Credit score requirements can change mid-process if you're close to the six-property threshold. Closing on another investment property while your new loan is processing could trigger the higher score requirement.

Reserve calculations often surprise borrowers. The requirement applies to the new property only, but lenders verify you have adequate reserves for all your investment properties. A portfolio of multiple rentals can require substantial liquid assets.

References

For the official guidelines, see 4201.13: Investment Property Mortgages in the Fannie Mae Selling Guide.