Daydreaming about a getaway at the beach? Or a ski cabin? Or maybe a second homebase closer to family? If so, some changes are afoot that could impact your financing options and the costs you pay and your interest rate. The interest rates available on second home loans have been identical to those for the purchase of a primary residence. That’s about to change… Fannie Mae and Freddie Mac are implementing significant new fees for loans secured to second homes.
Questions… but a happy ending!
Who are Fannie Mae and Freddie Mac? What fees are they charging and why? Read on for answers to all of these questions… and (spoiler alert!) a happy ending!
(Guaranteed Rate has loan options for second home buyers that circumvent these costs.)
Fannie, Freddie and… Jimmy?
Let’s start at the very beginning, with the formation of Fannie Mae and Freddie Mac. Fannie and Freddie were chartered by Congress with a mission – to create stability and liquidity in the housing market and (critically to the story ahead) to make home ownership more affordable.
Fannie and Freddie accomplish these goals indirectly, by purchasing mortgages from lenders after closing. You don’t apply for a mortgage directly with Fannie or Freddie. Instead you apply with a mortgage lender (like yours truly, Guaranteed Rate). We help you navigate the process and then fund your loan using our resources.
No lender has unlimited funds. So after closing, we lenders bundle up loans we’ve funded and sell them to Fannie and Freddie. This replenishes our resources and assures that any time you want a mortgage, we’ll always have money to lend.
Worth mentioning, this was not always the case. Prior to the formation of Fannie Mae (in 1938), access to a home loan depended on whatever deposits your local savings and loan had (or didn’t have) available to lend to you. The old Jimmy Stewart movie It’s a Wonderful Life offers a glimpse into how mortgage banking worked back in the day. Quaint (and who doesn’t love Jimmy?), but not very efficient!
Enter FHFA – like a Boss
Although chartered by Congress, Fannie and Freddie operated as private companies. But during the financial crisis in 2008, Fannie and Freddie needed an infusion of cash to stay solvent. They got it… from We The People. The two agencies went into conservatorship and became the property of the US government (where they remain). The Federal Housing Finance Agency (FHFA) was formed to regulate Fannie and Freddie.
Foreshadowing today’s changes
On March 10, 2021, in a surprise move, the FHFA decided to limit the purchases of loans secured to second homes and investment properties. This limitation was in place for about six months before being suspended September 14, 2021. In hindsight, however, the FHFA tipped its hand – Fannie and Freddie were reassessing their participation in second home lending.
Which brings us to today…
On January 5, 2022, the FHFA directed Fannie and Freddie to start charging lenders higher fees on loans secured to second homes. These fees are effective for loans purchased starting April 1. Lenders need time to process and close a loan before they can sell it, any lenders who have not already implemented these fees will be doing so any moment now.
What are the damages?
The increased costs are tiered based on down payment, ranging from 1.125% to 4.125% of the loan amount. If paid as part of closing costs that amounts to an extra $1125 to $4125 per $100,000 of loan amount. On a $500,000 mortgage that would be $5625 to $20,625 extra… on top of all the usual closing costs. Ouch!
Most buyers won’t pay these fees entirely as a part of their closing costs. In fact, lending rules prohibit lenders from charging more than 3% in total fees. Instead these costs will be absorbed into a higher interest rate. The difference in rate will vary based on a number of factors, but it’s likely to be a minimum of .5% and could be well over 1%.
Not unprecedented, usually risk-based
Fees of this type are actually quite common in lending. They’re called Loan Level Pricing Adjustments (LLPAs) and are typically risk-based. If a particular aspect of a loan corresponds to a higher chance of default, LLPAs cover the financial losses the lender is at risk of incurring.
Examples include loans to borrowers with lower credit scores, loans secured to manufactured homes or multi-family properties or loans secured to investment properties. In fact, for loans with less than 30% down, the cost for a loan secured to a second home will be identical to a loan on an investment property.
Loan Level Pricing Adjustments for Occupancy
Why? And why now?
In the announcement, Acting Director of the FHFA had this to say:
“These targeted pricing changes will allow the Enterprises to better achieve their mission of facilitating equitable and sustainable access to homeownership, while improving their regulatory capital position over time. Today’s action represents another step FHFA is taking to strengthen the Enterprises’ safety and soundness and to ensure access to credit for first-time home buyers and low- and moderate-income borrowers.”
To paraphrase: By charging more on loans secured to second homes Fannie and Freddie can shore up the funding they use to make homeownership more affordable and to keep costs down on loans to first-time buyers and lower income households.
Remember Fannie Mae and Freddie Mac’s mission? FHFA is acting to shift focus to creating homeownership opportunities where they are most needed. Making loans on second homes isn’t where they want to focus their resources.
Guaranteed Rate to the rescue
If you’re thinking about a second home purchase and wondering about how these costs will impact you, I have some good news. With this move, the FHFA has created an opening for the private marketplace to step in and serve second home buyers. And step in it has!
At Guaranteed Rate, we have expanded our private label mortgage program to offer loans secured to second homes. We don’t sell these “portfolio” loans to Fannie or Freddie which means they are not subject to the new fees.
Additionally, we offer multiple jumbo loan programs for second homes. Jumbo loans are those that exceed the limits set by Fannie Mae and Freddie Mac ( $647,200 for a single family home, in most of the country, in 2022). Because jumbo loans are not sold to Fannie or Freddie, they are also not subject to these extra fees. (Fun fact: as I write this, our lowest rate 30 year fixed option is a jumbo loan.)
Stop daydreaming and give us a call
If you find your mind wandering to a sweet little getaway, stop daydreaming and give us a call. We can help you explore financing options and secure pre-approved so that you can start your search for the perfect home away from home.
All information provided in this publication is for informational and educational purposes only, and in no way is any of the content contained herein to be construed as financial, investment, or legal advice or instruction. Guaranteed Rate, Inc. does not guarantee the quality, accuracy, completeness or timelines of the information in this publication. While efforts are made to verify the information provided, the information should not be assumed to be error free. Some information in the publication may have been provided by third parties and has not necessarily been verified by Guaranteed Rate, Inc. Guaranteed Rate, Inc. its affiliates and subsidiaries do not assume any liability for the information contained herein, be it direct, indirect, consequential, special, or exemplary, or other damages whatsoever and howsoever caused, arising out of or in connection with the use of this publication or in reliance on the information, including any personal or pecuniary loss, whether the action is in contract, tort (including negligence) or other tortious action.
Photo credit: Beach Houses Muizenberg Beach by Stefan Schäfer Lich CC-BY-SA-3.0