Fannie Mae’s 5% Down Payment for Multi-Family Homes

Fannie Mae is a government-sponsored enterprise (GSE) that was created to improve home affordability. Fannie’s mission to provide access to affordable home financing continues today, as reflected in the move to lower the down payment requirement for multi-family homes.

Formally known as the Federal National Mortgage Association, they have been in business since 1938. They don’t originate mortgages or loan money directly to borrowers. What they do is purchase mortgages that meet their requirements. They acquire these home loans from mortgage lenders like CrossCountry Mortgage, package them into guaranteed investments called mortgage-backed securities (MBS), and then sell those investment instruments. This creates a new flow of funds for lenders to use to originate more mortgages. 

To qualify for purchase by Fannie Mae, mortgages must meet certain requirements. Chief among these is adhering to the loan limits set every year by the Federal Housing Finance Agency (FHFA). Fannie also sets standards for credit scores, debt-to-income ratios, down payments, and reserves. If you want a Fannie Mae loan, your lender will need to make sure you meet these basic qualifications, as well as any others for specific loan programs, such as those for first-time homebuyers, or for buyers in certain geographic areas. 

The reduced down payment requirement is a new, important way for Fannie Mae to improve access to housing. Before this change, you needed a 15% down payment for a 2-unit home, and a 25% down payment if you were buying 3-4 units. Now, you don’t have to delay your purchase to save for an extra 10%-20%. Here’s another plus. This change applies to several Fannie Mae mortgage types, including renovation loans, so if you’re interested in buying a property that needs work, there’s a 5% down loan for you, too. 

We mentioned loan limits earlier. Here’s a more detailed explanation. Every year, the FHFA sets limits for loans that can be purchased by Fannie Mae and Freddie Mac (the other large GSE mortgage purchaser). These are called conforming loans because they conform to the rules set by the FHFA. The limits are based on home prices, and while most of the country falls under a single loan limit, certain higher-priced areas have higher loan limits to compensate for more expensive housing. 

Loan limits are also higher for 2-4 unit properties than they are for single-family homes. It makes sense that a larger property housing more than one family should have a higher loan limit. However, the 5% down payment does not apply to multi-family home purchases in high-cost areas. 

Buy sooner. Instead of waiting until you’ve saved a 15%-25% down payment, you can start with just 5%.  

Live in one unit, rent the other 1-3 units. Use the rent money to pay the mortgage on the building, as well as the associated costs of taxes, insurance, and upkeep.  

Benefit from growth in the entire property’s value, not just the space you occupy. 

If you’ve heard that there’s financing for multi-family purchases with an even lower down payment than 5%, you’re right, but there’s a catch. While FHA has a minimum down payment of 3.5%, there’s a mandatory FHA self-sufficiency test for purchasers of 3-4 unit homes. This requires that the rental income is sufficient to cover the entire mortgage payment, including principal, interest, taxes, and insurance. Fannie Mae doesn’t have this requirement, giving you greater financial leeway. There are other differences, too, so your loan originator will help you decide on the right loan for you. 

Your first step to homeownership should always be a consultation with a loan officer. We don’t just say that because we’re a lender. You need to know how much you can afford – or want to spend – before you start looking at homes. 

Why find something you love and then be disappointed if it’s not in your price range? It may be even more important if you are considering a multi-family home purchase. You’ll want to understand the cash flow you’ll need to make your mortgage payments and maintain the property. Your loan officer will review all the mortgage documentation and requirements with you.