The short answer to this question is probably so. A recent rule change for the Federal Housing Finance Agency (FHFA) likely makes it more expensive to take out a second-home loan. Therefore, whether you are buying a vacation home or an investment property, you may see increased costs. The rule went into effect on April 1, 2021. Although this rule change will not impact cash buyers, many real estate investors that seek financing will likely feel the impact.
What is the new rule?
The rule affects the second-home market indirectly by limiting the number of second-home loans Fannie Mae or Freddie Mac will buy to 7%. For perspective, this is up to half of the number of loans that they have historically purchased. FHFA is the federal agency that oversees Fannie Mae and Freddie Mac. The rule doesn’t force lenders to change their mortgage criteria directly, but increased risks make it almost certain that most will tighten their lending standards for second-home buyers.
Most lenders that originate mortgages eventually sell some of their loans to Fannie Mae or Freddie Mac. The new FHFA 7% rule for second homes means lenders might not be able to sell a second-home loan to Fannie Mae and Freddie Mac even if they followed all the qualified-mortgage rules. Thus, this raises the lenders’ risks. Ultimately, the fees or the interest rates charged for a second-home loan are expected to go up.
Will closing costs rise?
Most likely, closing costs will rise. With this said, each mortgage lender must consider the new rule and make risk decisions accordingly. We are already beginning to see various mortgage lenders increase their closing costs. Other lenders are raising interest rates and thus rolling the added-risk cost into the loan itself.
Will lenders begin turning down second-home loans?
The FHFA rule doesn’t force a lender to cap second-home loans to 7%. Furthermore, other criteria such as credit scores, down payments or debt-to-income ratios still remains the same. Each mortgage lender will make their own decisions on second-home loans and ways to minimize risk.
While these changes may be significant to certain borrowers, it is important to note that not all loans are sold to Fannie Mae or Freddie Mac. Some mortgage lenders decide to keep various mortgages in their portfolios. As an example, jumbo loans already fall outside FHFA qualifications, yet lenders approve these loans every day.
In South Florida, we do not foresee the demand for second-homes diminishing any time soon. In fact, we continue to see a rise in vacation homes, investment properties, & other second-homes purchased. In fact, some lenders may create their own programs to address this demand in the future.
Are you considering the purchase of a second-home in South Florida? We can help. Contact Live South Florida Realty, Inc. today!