Why Fannie Mae and Freddie Mac Cap Investors at 10 Financed Properties?
Reaching the 10-property financing limit is a common milestone for successful real estate investors in Texas. While it feels like a roadblock, it's important to understand why this rule exists. Fannie Mae and Freddie Mac, the government-sponsored enterprises (GSEs) that buy most conventional loans from lenders, created this cap primarily for risk management. (The data, information, or policy mentioned here may vary over time.)
Their core mission is to support the U.S. housing market for primary homebuyers. A portfolio of more than 10 properties is viewed less as a personal investment and more as a commercial enterprise. By capping their exposure at 10 loans per investor, the GSEs limit their risk in the commercial real estate sector, which can be more volatile than the owner-occupied housing market. This isn't a judgment on your success; it's a policy that forces you to graduate from consumer-grade financing to commercial-grade solutions designed for professional investors.
Conventional Underwriting vs. DSCR Loans
To scale past the 10-loan limit, you must shift your financing strategy away from conventional loans, which are based on your personal income. The primary tool for this transition is the Debt-Service Coverage Ratio (DSCR) loan.
Conventional Loan Underwriting
Conventional underwriting is borrower-focused. Lenders meticulously analyze your personal financial profile. They require:
- Personal Income Verification: W-2s, tax returns, and pay stubs are used to prove your income.
- Debt-to-Income (DTI) Ratio: Your total monthly debt payments (including the proposed new mortgage) cannot exceed a certain percentage, typically 43-50%, of your gross monthly income. (The data, information, or policy mentioned here may vary over time.)
- Credit History: A deep dive into your personal credit report and score.
As you add more properties, your DTI ratio increases, making it progressively harder to qualify for new loans, even before you hit the 10-property cap.
DSCR Loan Underwriting
DSCR loans are property-focused. Lenders are primarily concerned with whether the property's income can cover its own debt. This is an asset-based lending approach.
The key metric is the Debt-Service Coverage Ratio, calculated with a simple formula:
DSCR = Gross Monthly Rental Income / Monthly PITIA
(PITIA = Principal, Interest, Taxes, Insurance, and Association Dues)
Lenders typically look for a DSCR of 1.20 or higher. This means the property must generate at least 20% more in rental income than its total monthly housing expense. (The data, information, or policy mentioned here may vary over time.)
- Example: You want to buy a rental in Austin, Texas.
- Gross Monthly Rent: $3,000
- Total Monthly PITIA: $2,400
- DSCR Calculation: $3,000 / $2,400 = 1.25
Since 1.25 is greater than the 1.20 guideline, the property qualifies on its own merit. The lender does not need to see your personal tax returns or verify your W-2 income. This is the key that unlocks unlimited scaling potential for your Texas portfolio.
How Portfolio Loans Help Scale Beyond 10 Properties in Texas
While a DSCR loan is perfect for acquiring one property at a time, a portfolio loan is a tool for managing your entire collection of assets. Unlike conventional loans sold to Fannie and Freddie, portfolio loans are kept on the lender's own books. This gives the lender the flexibility to set its own underwriting rules.
Instead of looking at just one property or your personal DTI, a portfolio lender assesses the health of your entire real estate business. They analyze the cumulative cash flow, equity, and performance of all your properties combined. This approach is ideal for seasoned investors who want to leverage the strength of their existing portfolio to secure financing for further expansion or to consolidate existing debt.
New Reserve and Credit Requirements
Graduating to investor-focused loans means meeting a higher standard of financial stability. Lenders view you as a professional operator and expect you to have more robust finances.
Credit Score
While conventional loans can sometimes be secured with scores in the low 600s, DSCR and portfolio lenders typically require a minimum credit score of 680, with the best terms and rates reserved for borrowers with scores of 720 or higher. (The data, information, or policy mentioned here may vary over time.)
Liquidity and Reserves
This is the most significant change. For a conventional loan, you might need six months of PITIA in reserves for the subject property. For investor loans, the requirements are much stricter. Lenders need to see that you can weather vacancies or unexpected repairs across your entire portfolio. You may be required to show:
- Six months of PITIA for multiple properties in your portfolio, not just the one being financed.
- A certain percentage of the total loan balance or total property value in liquid assets (e.g., 5-10%).
(The data, information, or policy mentioned here may vary over time.)
- Example: If you own 12 Texas properties with a total outstanding loan balance of $3 million, a lender might require you to have $150,000 (5% of the total loan balance) in a verifiable liquid account.
Moving Properties into an LLC
Do you need to move your existing properties into a Limited Liability Company (LLC) to qualify? While not always a strict requirement for your first DSCR loan, it is the standard and highly recommended practice for scaling investors.
DSCR and portfolio lenders prefer lending to business entities for several reasons:
- Liability Protection: It separates your personal assets from your business assets. If a lawsuit arises from one of your rental properties, your primary home and personal savings are shielded.
- Professionalism: It demonstrates that you are operating a formal business, which gives lenders more confidence.
- Financing Requirements: Many non-conventional loan products are specifically designed for and can only be made to a business entity like an LLC.
Consult with a real estate attorney and a CPA to understand the process and tax implications of transferring your properties from your personal name into an LLC.
Creating a Schedule of Real Estate Owned (SREO)
For any portfolio or DSCR loan application, you will need to prepare a Schedule of Real Estate Owned (SREO). This is a comprehensive spreadsheet that provides the lender with a high-level overview of your entire real estate business. It's your portfolio's financial statement.
Your SREO should include the following columns for each property you own:
Property AddressProperty Type (e.g., Single-Family, Duplex)Current Market ValueOriginal Purchase PriceCurrent Mortgage BalanceLender NameMonthly Mortgage Payment (PITIA)Gross Monthly RentNet Monthly Cash Flow (Rent - PITIA)
An accurate and well-organized SREO is critical. It's the primary document lenders use to assess your experience, organization, and the overall profitability of your portfolio.
Using a Blanket Loan to Consolidate Texas Mortgages
A blanket loan is a single mortgage that covers two or more properties. This can be a powerful tool for experienced investors looking to simplify their finances or unlock equity.
Pros of a Blanket Loan
- Simplified Management: You make one monthly payment instead of juggling 10 or more individual loans.
- Unlocking Equity: By cross-collateralizing your properties, you can often secure a larger loan amount or a cash-out refinance based on the portfolio's total value.
- Release Clause: Most blanket loans include a 'release clause'. This allows you to sell one of the properties from under the blanket loan without having to refinance the entire mortgage.
Cons of a Blanket Loan
- Interconnected Risk: A default on the single blanket loan puts all the included properties at risk of foreclosure.
- Complexity: These are more complex financial instruments with potentially higher closing costs and stricter underwriting requirements.
Best Strategy for Scaling From 10 to 20 Properties
Successfully growing your portfolio from 10 to 20 properties in Texas requires a deliberate shift in strategy. Here is a proven roadmap:
- Organize Your Business: The first step is to get organized. Create your detailed SREO, establish an LLC for future purchases, and gather all your financial documentation. Treat your portfolio like the professional business it has become.
- Build Your Power Team: Your local bank mortgage officer is no longer equipped to handle your needs. You need a mortgage broker who specializes in DSCR, portfolio, and other non-QM (Non-Qualified Mortgage) products for Texas investors.
- Strategic Refinancing: Identify one or two properties in your existing portfolio with significant equity. Execute a cash-out refinance on them using a DSCR loan. This moves them out from under the conventional loan umbrella and injects tax-free capital into your business for down payments on new acquisitions.
- Acquire New Properties with DSCR Loans: Use the capital from your refinance for the down payment on property #11. Finance it with a DSCR loan, qualifying based on the property's cash flow. Repeat this process for properties #12, #13, and beyond.
By systematically refinancing existing properties and using asset-based loans for new ones, you remove your personal income from the equation. Your ability to scale is now limited only by your ability to find great deals in the Texas market, not by arbitrary financing caps.
If you're a Texas investor ready to scale beyond 10 properties, your strategy needs to evolve. Explore the DSCR and portfolio loan options designed for your goals and connect with an investor-focused mortgage expert. When you're ready to take the next step, you can Apply for a Mortgage.
Author Bio
David Ghazaryan is the expert mortgage strategist and founder behind iQRATE Mortgages. With a mission to fund home loans that traditional banks won't touch, David specializes in helping clients with unique financial situations, including those recovering from foreclosure or bankruptcy. He expertly crafts smart, strategic, and stress-free mortgages by leveraging a vast network of over 100 lenders to secure competitive rates for investors and homebuyers alike. Praised for exceptional customer service, David has helped hundreds of families with a 97% satisfaction rate, guiding them to the mortgage they deserve.
