It used to be easy to buy a new home and retain your old home as an investment property. In many cases this was how homeowner's became landlords and would subsequently purchase more investment property to diversify their investment portfolio. The days of this being an easy transition are over thanks to changes in how Fannie Mae views primary residence conversions.
- Rental Income can only be used if the property being left has 30% of equity ratained in the property (must be documented via appraisal, broker's price opinion (BPO) or by Automated Valuation Model(AVM)).
- If there is less than 30% equity retained in the current residence the borrower must qualify using the payments from the current residence as well as the new property that they are looking to purchase; meanwhile qualifying with no rental income. In addition the borrower must have a minimum of six months reserves to cover the expense of both properties principle, interest, taxes and insurance payments (PITI) in a liquid account.
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If the 30% equity is retained there needs to be a fully executed lease with proof of payment by source and seasoning funds for deposit. This means that there must be a contract and documentation to show proof of payment and deposit.
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Finally, for qualification purposes the borrower still qualifies using only 75% of the rental income due to long standing underwriting standards that use this equation to compensate for vacancy rates.
While there is still room to purchase secondhomes buyers need to be aware of more stringent lending guidelines along with their Realtors that advise them on these transactions.
Jason Norris, MBA, CMPS, President MFG Mortgage Services, LLC 1.775.322.0496
