If you’re considering an investment property loan, you’ll likely get one approved by Fannie Mae or Freddie Mac. These government-sponsored enterprises set pricing and eligibility standards for most mortgages.
Although you can't obtain a mortgage directly from Fannie Mae or Freddie Mac, most mortgages, including investment loans, must meet their standards.
When you apply for an investment property loan through Fannie Mae or Freddie Mac, you do so via a traditional lender, such as a bank or credit union. Whether you realize it or not, the standards set by these entities significantly impact your ability to secure an investment loan.
Here are the investment loans these two companies offer and how they compare to alternative options, such as Federal Housing Administration (FHA) loans.
Fannie Mae
| Qualifications | HomeReady | Multi-Family Financing |
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| Minimum credit score |
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| Income limits |
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Fannie Mae (short for the Federal National Mortgage Association) focuses on making mortgages accessible to low- and moderate-income buyers. It achieves this by purchasing mortgages from large financial institutions like banks and credit unions, freeing up funds for these institutions to offer more mortgages.
Fannie Mae was founded in 1938 as part of the New Deal to provide stability and liquidity to the home financing market when many homeowners faced foreclosure.
It’s especially credited with popularizing the 30-year mortgage in the 1950s, which made home loans more predictable and, in turn, made home ownership more widely available.
1. HomeReady Mortgage
The HomeReady Mortgage, sponsored by Fannie Mae, is designed for low-income borrowers.
Instead of the standard 20% down payment that most mortgages require, the HomeReady Mortgage allows for a down payment as low as 3%, even lower than the 3.5% required by FHA loans.[1]
HomeReady offers lower insurance requirements, low financing costs, and flexible terms. A $2,500 credit for very low-income borrowers can also be applied to the down payment.
You'll need a minimum credit score of 620 to be eligible, which is higher than FHA loans but better than many conventional loans. Borrowing limits are also in place, which in 2024 is $766,550 for most of the contiguous United States. You must pay for mortgage insurance if your down payment is less than 20%.
While you can use a HomeReady Mortgage to buy an investment property, such as with house hacking, the income requirements might make this difficult. Your income must be at 80% or lower of the area median income, so if your income is too high, you won't qualify.
However, another version of the HomeReady Mortgage is tailored to multi-family properties.
2. Financing for Multi-Family Properties
Fannie Mae offers multiple financing options for multi-family properties, including cooperatives, rural properties, and affordable housing. For existing conventional properties with five or more units, you'll need at least a 20% down payment and good credit.[2] Additionally, the property must maintain at least 90% occupancy for 90 days before funding.
However, you can also apply for a HomeReady loan specifically for owner-occupied two-, three-, and four-unit properties. As of November 2023, Fannie Mae reduced the down payment requirement for these multi-family unit loans to just 5%.[3]
For these HomeReady loans, you must live on the property, and you can only qualify for one loan at a time. The new loan limits are $929,850 for duplexes, $1,123,900 for triplexes, and $1,396,900 for fourplexes.
While these new terms make investing in multi-family properties much more affordable, the maximum loan amounts may be too low if you invest in cities with higher real estate prices.
Freddie Mac
| Qualifications | Home Possible Loan | Multi-Family Financing |
|---|---|---|
| Down payment | As low as 3% | 15-25% |
| Minimum credit score | 660 | 680 |
| Minimum income | 80% or less of area median income | 80% or less of area median income |
Freddie Mac (short for the Federal Home Loan Mortgage Corporation) is the sister organization of Fannie Mae.
Like Fannie Mae, Freddie Mac purchases mortgages to provide liquidity in the home loan sector. However, unlike Fannie Mae, Freddie Mac primarily buys loans from smaller banks and credit unions.
Founded by Congress in 1970 as a private company with federal government backing, Freddie Mac was created to compete with Fannie Mae and increase the availability of mortgage funds.[4]
Following the 2008 subprime mortgage crisis, the federal government placed Freddie Mac and Fannie Mae under conservatorship, which they remain under as of 2024.
1. Home Possible Loan
Freddie Mac’s Home Possible loan is similar to Fannie Mae’s HomeReady Mortgage. Both require a down payment of just 3%, an area median income of 80% or less, and mortgage insurance if the down payment is less than 20%. However, the minimum credit rating for a Home Possible loan is 660, compared to 620 for HomeReady.[5]
Home Possible aims to lower the barriers to entry for low-income borrowers who may struggle to come up with the typical 20% down payment. These loans can be used by both first-time and repeat homebuyers and for conventional mortgages and refinancing.
However, the 3% down payment loan can only be used for your primary residence, and borrowers must meet the income requirements. If your income is too high for Home Possible loans, other loan types like FHA loans have more flexible requirements.
2. Investment Property Mortgages
Home Possible loans can also be used to purchase multifamily properties of two, three, or four units.
Unlike HomeReady multifamily mortgages, Home Possible loans for multi-family units have significantly higher down payment requirements, depending on whether you’ll be living in the property:
- 2-unit owner-occupied: 15%
- 2- and 4-unit owner-occupied: 20%
- 1-unit investment property (not a primary or second home): 15%
- 2- to 4-unit investment property: 25%
Multi-family Home Possible loans also have stricter requirements for the sources of down payments. Unlike loans for primary residences, multi-family residence loans can't be funded using gifts.
While Home Possible multi-family unit loans are more restrictive than HomeReady multi-family loans, they may still be easier to obtain than typical multi-family unit mortgages. Interest rates are generally lower, and the required debt-to-income ratio is 45%, higher than some other loans offer.
Alternatives to Fannie and Freddie Investment Loans
Alternatives include conventional loans, FHA loans, private loans, hard money loans, and seller financing.
Conventional loans
These follow the guidelines set by Fannie Mae and Freddie Mac but differ from specific programs like HomeReady and Home Possible.
For conventional investment property loans, lenders may require up to a 20-30% down payment. However, you can get loans for properties larger than four units without needing to live there.
FHA Loans
FHA loans are similar to HomeReady and Home Possible loans in their eligibility requirements. They require a minimum down payment of 3.5% and offer financing for properties with up to four units, provided you occupy one of the units.
FHA loans have lower credit score requirements: 580 or higher for a 3.5% down payment, and 500-579 for a 10% down payment.[6]
Private money
If you have friends, family, or business partners with sufficient resources, you can ask them for a private loan. The terms and rates will vary depending on who is lending you the money, potentially offering a better deal than traditional lenders.
Friends and family may also be more lenient if you have a poor credit rating. However, involving close relations in financial transactions can be risky if you can't repay the loan.
Hard money lenders
Hard money loans are short-term loans best suited to investors planning to flip properties quickly. You can purchase a property with a hard money loan and then pay it off shortly afterward when the property sells.
These loans are easier to qualify for than conventional loans but come with very high interest rates. If the property doesn't sell quickly, you could incur significant costs from interest payments.
Seller financing
With seller financing, instead of applying for a mortgage, you provide the seller with a down payment and then pay monthly installments until you own the property.
This can be a good option if you have little money upfront or difficulty qualifying for a conventional mortgage. However, seller financing is risky since defaulting on payments could result in losing the property and any equity you would have built up with a conventional mortgage.
