Real Estate Investing Investment Property Financing 4 β Questions and Answers
Question 1: What is the maximum number of financed properties Fannie Mae allows a single investor to have while still qualifying for conventional financing?
- 4
- 6
- 10 (Correct answer)
- 15
Correct answer: 10
Fannie Mae allows investors to finance up to 10 properties simultaneously, though requirements become stricter after the 4th financed property.
Question 2: When a lender 'impounds' taxes and insurance on an investment property loan, it means:
- The lender owns the property taxes
- Monthly payments include a portion held in escrow for tax and insurance bills (Correct answer)
- The lender waives insurance requirements
- The investor pays taxes directly to the IRS
Correct answer: Monthly payments include a portion held in escrow for tax and insurance bills
Impound (escrow) accounts collect monthly installments alongside the mortgage payment so the lender can pay property taxes and insurance when due.
Question 3: Which financing structure is MOST appropriate for an investor purchasing a 12-unit apartment building?
- FHA 203(k) loan
- VA loan
- Commercial multifamily loan (Correct answer)
- HomeReady mortgage
Correct answer: Commercial multifamily loan
Properties with 5+ units are classified as commercial real estate and require commercial multifamily financing rather than residential loans.
Question 4: What is 'cross-collateralization' in investment property financing?
- Using one property's equity as collateral for a loan on a different property (Correct answer)
- Securing a loan with both real and personal property
- Two investors co-signing on the same mortgage
- Pledging rental income as collateral instead of the property
Correct answer: Using one property's equity as collateral for a loan on a different property
Cross-collateralization links multiple properties as security for a single loan, meaning a default on one loan could put all pledged properties at risk.
Question 5: An investor is considering a 5/1 ARM for a rental property. What happens after the initial 5-year period?
- The loan converts to a fixed rate permanently
- The rate adjusts annually based on a benchmark index plus a margin (Correct answer)
- The loan term resets to 30 years
- The investor must refinance or pay off the balance
Correct answer: The rate adjusts annually based on a benchmark index plus a margin
After the 5-year fixed period, a 5/1 ARM adjusts the interest rate every year based on a market index (e.g., SOFR) plus the lender's margin.
Question 6: Which metric do commercial lenders primarily use to evaluate multifamily loan applications?
- Borrower's personal debt-to-income ratio
- Net Operating Income relative to debt service (Correct answer)
- Loan-to-cost ratio only
- Borrower's personal credit score exclusively
Correct answer: Net Operating Income relative to debt service
Commercial lenders focus on Debt Service Coverage Ratio (NOI Γ· annual debt service), requiring a minimum of 1.20-1.25x to ensure the property generates enough income.
Question 7: A real estate investor uses a 'subject-to' deal. What does this mean?
- The sale is subject to a home inspection contingency
- The buyer takes over the seller's existing mortgage without formally assuming it (Correct answer)
- The lender approves the buyer before closing
- The property is subject to a government lien
Correct answer: The buyer takes over the seller's existing mortgage without formally assuming it
In a 'subject-to' transaction, the buyer takes title to the property while the existing mortgage remains in the seller's name, carrying the risk of a due-on-sale clause trigger.
Real Estate Investing Investment Property Financing 4
What is the maximum number of financed properties Fannie Mae allows a single investor to have while still qualifying for conventional financing?