Fannie Mae Updates Guidelines for Real Estate Owned Properties: What You Need to Know

Fannie Mae Updates Guidelines for Real Estate Owned Properties: What You Need to Know

Fannie Mae, one of the leading entities in the mortgage and housing industry, has recently introduced significant updates to its guidelines concerning Real Estate Owned Properties (REOs). These updates primarily pertain to lease agreements, rental calculations, and rental income. In this article, we’ll break down these changes to help you understand their implications.

Documentation Requirements for Lease Agreements

One of the key changes involves the documentation requirements for lease agreements in REOs. Fannie Mae now accepts either Form 1007 or Form 1025, in addition to allowing for a two-month rental income receipt to support rental income claims. This flexibility aims to simplify the process for borrowers and lenders alike, making it easier to provide the necessary documentation for rental income verification.

Rental Calculation Restrictions

Fannie Mae has implemented specific rental calculation restrictions for REOs. These restrictions are contingent upon two key factors:

  1. Current Housing Expense: Borrowers must have a current housing expense. This means that if you own a primary residence or have housing-related expenses, you need to factor those into the rental calculation.

  2. 12-Month History of Managing Rentals: To fully consider rental income, borrowers are required to have a 12-month history of managing rental properties. This requirement ensures that borrowers have adequate experience in handling rental properties, mitigating potential risks associated with rental income calculations.

Exception for Borrowers Without Rental History

However, there is an exception to the rule. If a borrower owns a primary residence (or has housing expenses) but lacks a 12-month history of managing rentals, they can offset only the rental income. This exception acknowledges the presence of a primary residence while allowing borrowers to utilize rental income from additional properties.

No Rental Income for Those Living Rent-Free

In cases where borrowers have no history of managing rental properties and incur no housing expenses (e.g., living rent-free), Fannie Mae’s updated guidelines prohibit the use of rental income from the related property. This provision ensures that only verifiable rental income is considered for mortgage qualification.

Self-Employment Changes

In addition to the REO-related updates, Fannie Mae is also implementing changes to its guidelines regarding self-employment. These changes will take effect for Desktop Underwriter (DU) case files submitted on or after January 1, 2024. Here’s what you need to know:

  • Businesses with Less Than 5 Years of Activity: Businesses with less than five years of activity will require a two-year income calculation to determine eligibility.

  • Borrowers with Less Than 24 Months of Self-Employment History: For borrowers with less than 24 months of self-employment history, Fannie Mae mandates that they have a 12-month track record of income reporting on their tax returns. This requirement ensures that borrowers have a stable and documented income source before applying for a mortgage.

In conclusion, these updates to Fannie Mae’s guidelines for REOs and self-employment signify a commitment to maintaining responsible lending practices and ensuring the accuracy of rental income calculations. Borrowers and lenders should familiarize themselves with these changes to navigate the mortgage process more effectively and make informed decisions. Always consult with a qualified mortgage professional for specific guidance tailored to your situation.