New Fannie Mae Guidelines for Second and Investment Homes

Why FHA Loans?
July 14, 2008
Coffee with the Mayor of College Station July 2008 – Lets Talk College Station Real Estate!
July 14, 2008

New Fannie Mae Guidelines for Second and Investment Homes

New guidelines from Fannie Mae are changing how buyers qualify for mortgages when they already own an existing primary residence and they want to purchase a new one while converting the old one to a second home or investment property.

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:

  • Sell the current residence and pay off the outstanding mortgage

  • Convert the property to a second home, assuming they can qualify with both the existing and new mortgage payments, or

  • 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:

  • 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).

  • 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.

  • 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:

  • 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:

  • Both the current and the proposed mortgage payments must be used to qualify the borrower for the new transaction; and

  • 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:

  • 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).

  • The 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 percent equity in the property cannot be documented, rental income may not be used to offset the mortgage payment.

    • Both the current and the proposed mortgage payments must be used to qualify the borrower for the new transaction; and

    • 6 months of PITI for both properties is required to be in reserves.

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 [email protected] 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!

40 Comments

  1. Susan Hilton says:

    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.

  2. Joey Condon says:

    Good to know!! Thanks!

  3. Beverly says:

    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

  4. Marcy says:

    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

  5. April says:

    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.

  6. Prabu Vontlin says:

    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?

  7. 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

  8. Rania says:

    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?

  9. Rania says:

    Sorry – forgot to mention – it’s an investment property (2 family house)

  10. 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!

  11. Jk says:

    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

  12. Wow, what an amazing post! I found your blog today, this is a really terrific post you made, let them roll!

  13. Jason says:

    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…

  14. seo company says:

    The best website……

    […]here are some links to sites that we link to because we think they are worth visiting[…]……

  15. Great Site……

    […]check this out as this contains important information about[…]…

  16. William says:

    So what’s the requirement for downpayment before all this?

  17. I do not even know how I ended up right here, but I thought this put up was once good. I do not recognize who you are however definitely you are going to a well-known blogger for those who aren’t already. Cheers!

  18. Telefon Sex says:

    They’re clearly women I telefonsex shop for clothes, but make money while I was sitting in that vibrating chair, I closed my eyes and said How did he do it?

  19. Continue using coconut oil and you’ll see the benefits in good, clear skin, free of dryness and other skin conditions and a lessening of fine lines and wrinkles. Although coconut oil is mainly used within soap for structural purposes, its added skin care benefits make it an element not to be overlooked by the cosmetic world. Nickel allergies were a lot more common in the past with the use of jet guns.

  20. sex phone says:

    Wow, incredible weblog structure! How long have you ever been blogging for? you made blogging glance easy. The entire glance of your website is wonderful, as smartly as the content material!

  21. Jenifer says:

    I read this piece of writing completely on the topic of the resemblance
    of newest and earlier technologies, it’s amazing article.

  22. Holleycrall says:

    It just means she has to fight Mother Nature as she does with other aging dilemmas like covering her stubborn grays and smoothing out her wrinkles… It is not possible to know for certain what your level of fertility is, indeed your fertility will change over time.
    http://pregnancyhelper.in/societal-pressure.html

  23. Jeffrey says:

    Your means of telling the whole thing in this paragraph is in
    fact pleasant, all be capable of without difficulty
    understand it, Thanks a lot.

  24. Sherita says:

    Past research has also shown that it protects against chemical induced inflammation of liver cells.
    You can find turmeric almost anywhere these days, such as supermarkets or even at your local
    corner Indian store. Other studies have found it can be as
    effective as a cortisone shot at pain relief and experience less morning stiffness because
    of it.

  25. Use finger and thumb pressure on the big areas, like the ball of the foot and heel.
    This may be particularly helpful for people who suffer from
    immune disorders, like AIDS, for this reason. Otherwise, it may be taken as a nutritional supplement since it will help the body to absorb vitamins and minerals.

  26. Richard says:

    Other factors that hurt pregnancy and increase chances of miscarriage include:.
    Students who chow down on burgers, fries, chicken nuggets or pizza at
    lunch, will get a quick blood sugar surge, accompanied by that all too
    familiar crash, most likely just as it’s time to walk into their next class. At the very least, we need to take in at least four to six servings of fruits and vegetables in one day but for optimum health and disease prevention, fourteen servings is what you should strive for.

  27. Fantastic website. Plenty of useful information here. I am sending it to some pals ans additionally sharing in delicious. And certainly, thank you to your effort!

  28. Normally I do not read article on blogs, but I would like to say that this write-up very compelled me to check out and do it! Your writing style has been amazed me. Thank you, very great post.

  29. WEB SITE says:

    Excellent submit, very informative. I wonder why the opposite experts of this sector do not understand this. You should continue your writing. I’m confident, you have a great readers’ base already!|What’s Going down i am new to this, I stumbled upon this I have discovered It positively helpful and it has aided me out loads. I’m hoping to give a contribution & assist other customers like its aided me. Great job.

  30. Number 3 explanation to utilize Probably * Mum ethusist: No expending hard-earned income again and again.

    Combined, they will form the best all-natural penile enlargement product ever made.
    When the desire to be able to climax occurs help make your
    lover informed.

  31. Old-school underwriters to do with advise another 10% to
    help you 15% maximal payment per month to make sure you payroll check
    part.

    Check out my web site; car title loans online

  32. Ryan says:

    Square Enix disclosed that the collection will be released
    exclusively for the Playstation 3 current-generation console sometime next year.
    If this is true, it’s another blow to backwards compatibility: All Xbox 360 games
    would need to be emulated, and emulation is a complex, resource-intensive task.
    And on top of the bug fixes, Steam players got an additional playable character with this patch.

    Here is my web-site; xbox 360 emulateur (Ryan)

  33. Just wish to say your article is as astonishing.
    The clearness to your put up is just excellent and that i can think you’re an expert on this subject.
    Fine with your permission let me to grasp your feed
    to stay up to date with approaching post. Thanks
    a million and please continue the gratifying work.

  34. Click here. says:

    Click here.

    New Fannie Mae Second Home and Investment Mortgage Guidelines | The Century Tree Reader

  35. Touche. Solid arguments. Keep up the amazing spirit.

    Have a look at my site: one for eleven hack

  36. Will it be warm, dried and exotic or are you currently traipsing by way
    of moist squelchy pastures. You have to make
    certain that the base of the hearth gets enough atmosphere such that it can undoubtedly fire, and
    the method to do that will be to focus on what’s named a cottage.

  37. Howdy! I know this is kind of off topic but I was wondering if you knew where I could find a captcha
    plugin for my comment form? I’m using the same blog platform as yours and I’m having problems finding one?
    Thanks a lot!

    my blog; http://Www.Youtube.com

  38. law says:

    First of all I want to say wonderful blog! I had a quick question in which I’d like to ask if you don’t mind.

    I was interested to know how you center yourself and clear your thoughts before writing.
    I’ve had a tough time clearing my mind in getting my thoughts out.
    I do take pleasure in writing however it just seems like the first 10 to 15 minutes are lost simply just trying to figure out how to begin. Any recommendations or hints?
    Kudos!

  39. Boot Cuffs says:

    More companies are opening their doors to payroll
    and finance and accounting outsourcing and this may be due to
    the fact that outsourcing may bring in more benefits to a company
    than they could have imagined. They could be involved
    in budgeting, cost management, evaluation, and strategic planning.
    Even if you aren’t on the preferred suppliers list, if you can offer some flexibility
    and meet the corporates needs you can overcome that.

  40. With us by your side, there is no reason why you cannot make a living gaming, and best of all, it’s on the schedule you choose.
    Read the content which you can relate to your niche.
    For example if you wear a size 10 running shoe start
    with trying on a size 8-.