New Fannie Mae Guidelines for Second and Investment Homes
July 14th, 2008 categories: Buying Real Estate, Market Trends, Mortgage Help, Real Estate News
I received a note yesterday from a friend of mine named Tony Varisco. He is an associate of Laraby Financial Group, Inc., a mortgage lender with offices in Bryan, Texas. His note had an attachment from one of his investors regarding new guidelines from Fannie Mae on the conversion of principal residences or investment properties. I called him to ask some questions, and here is what he said.
It seems that Fannie Mae, the private, shareholder-owned, NYSE-listed financial services company that serves the American home mortgage industry, has recommended new guidelines for lenders. These guidelines deal with buyers who are seeking to purchase a new primary residence while converting their old one into a second home or an investment property.
While this is only from one investor and not an official publication from Fannie Mae, he said that most other investors will fall in line or close to it on these new guidelines because they come from Fannie Mae. These guidelines are meant to ensure a borrower’s financial stability and help prevent future mortgage default and foreclosure.
While these new guidelines are not yet in effect, they could go into effect at any time. At issue is how mortgage lenders qualify borrowers for mortgages when they already have an existing mortgage on a primary residence.
Borrowers who currently own a home typically have three options when they decide to purchase a new principal residence. They can:
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Sell the current residence and pay off the outstanding mortgage
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Convert the property to a second home, assuming they can qualify with both the existing and new mortgage payments, or
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Convert the property to an investment property and provide documentation that they will rent the property and use the income to offset the mortgage payment
These policies and guidelines are in place to ensure that borrowers have sufficient equity and/or reserves to support the existing financing and the new mortgage being originated. However, Fannie Mae is updating the policies for qualifying borrowers purchasing a new principal residence and converting their existing principal residence to a second home or investment property to better ensure that borrowers will be able to support both financial obligations.
The current requirements are:
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Rental income that will be generated from the prior principal residence is based solely on a fully executed lease agreement for that property provided by the borrower (now landlord).
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If the lender uses current lease agreements, the net rental income will be 75 percent of the gross rent from the lease agreement, with the remaining 25 percent being absorbed by vacancy losses and ongoing maintenance expenses.
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Minimum reserves are required for investment properties: 2 months for one-unit properties, and 6 months reserves for two- to four-unit properties. Minimum reserves are not required for second home transactions.
The new requirements are broken down into categories. Following are the new categories and requirements.
If the current principal residence is pending sale but the transaction will not be closed (with title transfer to a new owner) prior to the new transaction:
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Both the current and the proposed mortgage payments must be used to qualify the borrower for the new transaction.
If the current principal residence is being converted to a second home:
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Both the current and the proposed mortgage payments must be used to qualify the borrower for the new transaction; and
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6 months of PITI for both properties is required to be in reserves. Lender may consider reduced reserves of no less than 2 months for both properties if there is documented equity of at least 30 percent in the existing property (derived from an appraisal, automated valuation model (AVM), or Broker Price Opinion (BPO), minus outstanding liens.)
If the current principal residence is being converted to an investment property:
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Fannie Mae will continue to permit up to 75 percent of the rental income to be used to offset the mortgage payment in qualifying if there is documented equity of at least 30 percent in the existing property (derived from an appraisal, AVM, or BPO, minus outstanding liens).
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The rental income must be documented with:
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A copy of the fully executed lease agreement; and
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The receipt of a security deposit from the tenant and deposit into the borrower’s account.
-
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If the 30 percent equity in the property cannot be documented, rental income may not be used to offset the mortgage payment.
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Both the current and the proposed mortgage payments must be used to qualify the borrower for the new transaction; and
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6 months of PITI for both properties is required to be in reserves.
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These guidelines are applicable to manually underwritten loans and, except for the additional reserve requirements, must also be applied (on a manual basis) to loan casefiles underwritten with DU. DU will determine the level of reserves for each casefile.
Whew! That was a lot of information! If you made it to the end of this, congratulations! For those who don’t already know what “DU” means (I had to ask, too!), it means Desktop Underwriting. It is a software program provided by Fannie Mae to the mortgage and banking industry to help them make sure a borrower meets all financial requirements for a loan.
So what does all of this mean? It means that it is going to get harder to purchase a new home before closing on the sale of your current residence, to own a second home, or to convert your current residence to investment property. Cash is king! Equity and rental income are part of the king’s court!
To summarize, if you can’t close on the sale of an existing home first, you must qualify for both mortgages at the same time. For conversion to a second home, you must qualify for both loans AND have 2-6 months of PITI reserves and 30 percent equity in the existing property OR have 6 months PITI reserves for BOTH properties. For conversion to investment property, you can use 75 percent of the rental income to offset the mortgage payment IF you can document at least 30 percent equity OR qualify for both mortgage payments AND have 6 months reserves for BOTH properties. To use the rental income, you must have a fully executed lease and a security deposit from the tenant deposited in the borrower’s account.
I would like to thank my friend, Tony Varisco, for his help and valuable insight for this article. If you are considering purchasing any type of real estate and need a mortgage loan, please consider contacting Laraby Financial Group at (979) 268-2626 or prequalify online at www.BCSHomeLoans.com .
If all of this is still confusing, please contact me at JasonJ@Century21BCS.com or 979-571-3553 (cell). As a REALTOR®, I have the training and knowledge necessary to see your transaction to a successful conclusion. Call or write today!
Yes, I actually read the entire thing! It was very informative. Knowing what to expect when purchasing is such an important part of the process.
Good to know!! Thanks!
I am confused regarding the conversion of primary residence to an investment..Your article states that if you don’t have 30% equity, than you have to qualify as to making BOTH mortgage payments and have 6 mos PITI..but in doing this THEN you can use 75% of the rental income? If you qualify using both payments, why would there be a need to use the 75% rental income. Also, it is also not clear on the 6 most PITI..Is that standard for every loan, or do the reserves depend on DO findings?
Please let me know
thanks
Bev
Question? Does this apply if you moved from another state due to change in jobs? For example I own my primary home in Florida but, recievd an offer from a company to work for them in another state. I’m now in NC and my primary homes is rented. I’m living in a rental apartment now and looking to buy a house. Does this mean the guidelines also affect me? Or am I excluded due to the change of job?
Thanks,
MG
I tried to refinance my 2nd home in North Carolina. When I got the loan on my 2nd home I already owned 7 properties and it was no problem to get the loan. Now, when I try to refinance my 2nd loan to get the lower rate, I am told that because I have over 4 properties, I can only have a 60% loan and I would have to come up with $32,000 to close the loan. One of my properties is a LIBOR due in 2012 and it looks like I won’t be able to refinance that either(they would only let me have a 60% loan), but it looks like if I am 3 months late on the payment they will do a loan modiication. Don’t want to ruin my credit and I have equity in my properties. All my properties are in the medium to low income. Looks like investers will not be able to refinance their properties.
I read the 6 months reserves, what does this mean, do i have to put that 6 months of 2 home mortgages in a escrow account?
I have an equity on my primary residents that they will
not redo to lower interest. they want me to roll my 1st into it.. I also own a second residents free and clear that my daughter lives in, but since it is not my primary the bank won’t do an equity. is there anyone that would? If I could possibly bring the interest down by rolling this equity on my primary to a first on the second home. It would really help. thanks
Hello,
Does anyone know about points up front? Mortgage company is charging me 3 points (she says it’s a 1 point for multifamily and 1.75 for investment) the remainder 1/3 is for her – does that make sense? she says she doesn’t make much on the interest rate at 5.65-% / 5.75% return – it’s February 26 – shouldn’t I get a slightly better finance terms? My credit is super and I qualified quickly…so why so much?
Sorry – forgot to mention – it’s an investment property (2 family house)
Very good post. I’ve found your blog via Bing and I’m really glad about the information you provide in your articles. Btw your sites layout is really messed up on the Chrome browser. Would be great if you could fix that. Anyhow keep up the good work!
My husband was transfered to Ga, we own a home in Ind. where I have a great job. My question is can we get a second home for him to live in Ga. His company pays his flights home every weekend. But it would be nice to buy a home in Ga? Thanks
Wow, what an amazing post! I found your blog today, this is a really terrific post you made, let them roll!
Does anyone know if this will work?
If I rent out my house for 6 months and live elsewhere (rent someplace,etc), after the 6 months of renting my house and collecting income, does it still fall into the category of ‘primary residence converted to rental’? I was hoping then to be able to claim the rental income and obtain another mortgage…
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Great information! I feel like I just got in on what has obvously been going on for some time…but better late than never at all…thanks for the article it is very enlightening to me…it was as if somehow my mind was being read! GOOD NEWS!I hope to find a way to qualify, that’s if time has not betrayed me.
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