Due to industry changes, your clients looking to buy a second home this year need to prepare to pay more.
To continue its mission of providing affordable primary residence purchases, the Federal Housing Finance Agency (FHFA) announced Jan. 6 that the agency is raising loan-level price adjustments (LLPAs) for second home transactions beginning with loans delivered to Fannie Mae and Freddie Mac on or after April 1, 2022. These types of loans do not fall under that FHFA mission, so by increasing the cost they are in essence trying to shift these originations to the private sector.
This means your second home financed by Fannie Mae and Freddie Mac will cost more via a higher interest rate, up-front discount points to buy the rate down, or both. Since it takes time to originate, close, fund and sell a loan to Fannie Mae, unfortunately, these price changes are already in effect.
LLPAs—upfront charges for certain risk factors such as high loan-to-value (LTV) ratio, low credit score, and multiple units—get passed on to homebuyers at loan origination in the form of points or through a higher rate.
For second homes, pricing adjustments will increase from their current 0% to 0.25% of the loan amount to between 1.125% and a whopping 3.875%, depending on LTV. If we look at a $400,000 purchase amount, even at a 60% LTV ratio, the increases will result in a discount point charge of $4,500 or a rate increase of 0.25% to 0.50% to offset the upfront cost.
As a result, financing second homes will basically cost as much as investment properties going forward. However, it’s possible to find creative solutions, such as a 60% first mortgage, a 20% second mortgage, and 20% down to avoid the highest fees.
Though we can’t control Fannie and Freddie, you can control your credit and therefore lessen some upfront costs. 720 or higher is best for second homes, investment properties, and the like.
Want help understanding what this all mean for you? The Reiner Realty Team can help! Call us today at 540-793-4095 or click here for more info.