The two government-controlled mortgage giants, Fannie Mae and Freddie Mac, have made moves to tighten mortgage rules on buildings with many short-term rentals and hotel-like amenities. This move could make entire buildings ineligible for Fannie/Freddie backed loans, and has already caused some issues in our resort town since its implementation early on in 2021.
When a project functions more like a vacation rental resort, the building can become ineligible for Fannie/Freddie backed financing. This is stemming from new language in the revised Fannie and Freddie guidelines that disqualifies buildings if they are “transient in nature”, meaning the bulk of the units are for short term rentals of less than 30 days.
Specific wording from the Fannie Mae website is: “Projects that have no other condotel characteristics, but which permit unit owners to offer short-term rentals on a seasonal basis while they reside in the units during a significant portion of the year, do not meet the criteria of “primarily transient in nature” under the condotel policy.”
Furthermore, when asked if a property is ineligible if professionally managed by a hotel or resort management company that facilitates short-term rentals, they state, “Projects that are professionally managed by hotel or resort management companies are likely to hire these firms to facilitate short-term rentals for the unit owners. In rare cases, some projects may choose these entities for professional management services that do not include rental or other condotel characteristics. In that case, Fannie Mae would be willing to discuss the possible eligibility of those projects and may review them through the Project Eligibility Review Service.”
These changes in the guidelines and the interpretation of the guidelines, would ultimately cause an increase in costs to purchase vacation condos if Fannie/Freddie backed loans are not available. This is because buyers would have to rely on non-conforming loan products, that require larger down payment percentages and carry higher interest rates than traditional 30-year fixed loans for second homes offer. Condo loans make up about 7-10 percent of Fannie and Freddie’s total business.
Jason Cook, Eastern Shore manager of Embrace Home Loans, said, “With the tightening of agency condo requirements, lenders will have to go to private equity or portfolio sources to fund these property types. This will most likely come with different pricing for the units affected by these changes. Buyers in our resort area need to understand the importance of using not only a local real estate agent, but also a local lender for their financing needs to help navigate through this most recent change.”
Lauren Bunting is an Associate Broker with Atlantic Shores Sotheby’s International Realty Inc. in Ocean City, Maryland.
Lauren Bunting is a Broker with Keller Williams Realty of Delmarva in Ocean City, Maryland.
