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New Second Home Rental Rules

By Steve Matthews

Wednesday, May 1st, 2019

Second-home mortgage closings just got less stressful for borrowers. On April 3, Fannie Mae updated a document called the “Second-Home Rider.” The previous version of the rider, in force since 2001, was interpreted by many lenders and homeowners as completely prohibiting second-home owners in mortgages backed by Fannie Mae or Freddie Mac from renting out the property.

The rider’s new language now explicitly allows homeowners to rent a second home after one year of ownership, and it allows short-term renting in the first year under certain conditions.

According to the Wall Street Journal, a Fannie Mae spokesman said the new rider language was triggered by calls from lenders asking whether borrowers could put their second homes on Airbnb and similar services. This was always allowed, said the spokesman, even though the old rider appeared to prohibit it, and was interpreted by many lenders that way.

Many lenders and mortgage brokers interpreted the old version of the rider to mean that borrowers who wanted to rent out properties—even for short-term rentals—needed to take out “investment mortgages,” which come with  significantly higher rates.

Despite the strict verbiage in the old rider, borrowers were rarely, if ever, penalized. “We are unaware of any mortgage in good standing being accelerated for violation of the rider alone,” the Fannie Mae spokesman said. “The people they are really concerned about are the people who never even intend to move in” and take advantage of lower rates for what is actually investment property.

A few things to note about Second-Home Riders:

• Even before the revision, Fannie Mae said it was unaware of any case where just violating the Second-Home Rider triggered a foreclosure.
• The new rider makes clear that some renting in the first year of ownership is allowed as long as the borrower uses the property personally most of the time and remains in charge of the rental process.
• The new rider also makes clear that restrictions on renting—either short-term or long-term—are only in place for the first year. After that, borrowers don’t need to seek permission from a lender to rent out their properties, a spokesman for Fannie Mae said.