Below is recent correspondence with Stephanie Hanna at Platinum 1st Mortgage. You will find the recent guidelines for buyers for both Fannie, Freddie and FHA loans.

You may not be aware of new guidelines that exist for buyers looking to convert their primary residence into a rental as they purchase a new primary residence. Unfortunately, the insurers (FHA, Fannie and Freddie) have made it more difficult for buyers to purchase a new home while keeping their old one. I’ve summarized the reason for the changes and the requirements below. Obviously, it’s my job to know the guidelines, not yours, but I know many of you appreciate knowing about the changes in our world.

Buy and Bail

Guidelines

Recently, Fannie Mae, Freddie Mac and FHA have observed an increasing number of homeowners who have chosen to vacate their existing principal residence and purchase a new residence. Oftentimes these homebuyers are declaring their intent to convert their existing home to an investment property for the purpose of using rental income to qualify, as the existing home will not be sold prior to the purchase of the new residence.

In situations such as this, there is a growing occurrence of homebuyers providing misleading information regarding the rental income of the property being vacated and used to qualify for the new mortgage. Sadly, the real intent of some homebuyers is to actually abandon the property being vacated and cease making payments on the previous mortgage; thus defining the term “buy and bail”. Although the property being vacated may not have an FHA, Fannie or Freddie insured mortgage, surrounding properties may and, thus, FHA, Fannie or Freddie may be indirectly negatively affected should that property result in a foreclosure.

Therefore, the following requirements must be met for borrowers converting their primary residence into an investment property.

FHA

A borrower who is converting their primary residence into an investment property must be able to qualify with both mortgage payments unless one of the following circumstances exists:

-Relocation: The homebuyer is relocating with a new employer or is being transferred.

-Sufficient Equity in Vacated Property: The borrower must have an ltv ratio of 75% or less as determined by a current appraisal

For either scenario, we must be able to document an executed lease agreement of at least one year’s duration and we must provide evidence of the security deposit and/or first month’s rent.

No additional reserves are required for FHA.

FANNIE/FREDDIE

A borrower who is converting their primary residence into an investment property must be able to qualify with both mortgage payments unless the borrower has an ltv ratio of 70% or less in the property being vacated. If 30% equity exists, 75% of the rental income may be used to offset the mortgage payment. Rental income must be documented with a copy of the fully executed lease agreement and the receipt of a security deposit from the tenant and deposit into the borrower’s account.

If the 30% equity cannot be documented, rental income may not be used to offset the mortgage payment. In addition

-Both the current and proposed mortgage payments must be used to qualify.

–Reserves of six months PITI for both properties is required.

Filed under: LOAN INFORMATION