Primary Residence To Be Retained As A Rental Property…Revisited
Posted by Kevin Kueneke | Visited 287 times, 2 so far today | Leave A Comment »
About a month or so ago, I wrote a post regarding FNMA’s new stance on purchase transactions where the borrower plans to retain their current principal residence as a rental property. You may remember that if the retained property did not have at least 30% equity then lenders would not be able to use any rental income from that property to offset the mortgage payment and help qualify.
At that time I focused mainly on the guideline change from an income qualifying standpoint because that seemed to affect the most would-be buyers. However, the reserve requirements changed as well which is now catching many borrowers, and lenders, off guard. In the breakdown that follows, the term “FNMA DU findings” refers to the assets that the automated underwriting engine requires to be verified. It can be as little as the actual amount of cash needed to close and as much as all assets that the client actually has.
Here is a breakdown of the new guideline and how it affects retained properties for rental purposes as well as retained properties as 2nd homes.
Scenario #1: The current primary residence will become a 2nd home AND at least 30% equity in the current primary residence can be documented.
New Policy: Both the current and the new mortgage PITI payments must be used to qualify the borrower for the new residence. The reserve requirements are the greater of the FNMA DU findings OR two months of PITI for both properties.
Scenario #2: The current primary residence will become a 2nd home AND at least 30% equity in the current primary residence can NOT be documented.
New Policy: Both the current and the new mortgage PITI payments must be used to qualify the borrower for the new residence. The reserve requirements are the greater of the FNMA DU findings OR six months of PITI for both properties.
Scenario #3: The current primary residence will become an investment property AND at least 30% equity in the current primary residence can be documented.
New Policy: If using rental income to offset the mortgage payment in qualifying then the reserve requirements are per the DU findings. The rental income must be documented with a fully executed lease agreement and proof that a security deposit was received from the tenant and deposited into the borrower’s account. If not using the rental income to qualify then the reserve requirements are the greater of the DU findings or two months PITI for both properties.
Scenario #4 (the big one): The current primary residence will become an investment property AND at least 30% equity in the current primary residence can NOT be documented.
New Policy: Rental income may not be used to offset the mortgage payment. Both the current and new mortgage PITI payments must be used to qualify the borrower for the new transaction. The reserve requirements are the greater of the DU findings or six months PITI for both properties. Six months PITI for both properties is typically much greater than the DU findings.
In all cases, to document the 30% equity, the lender must obtain either a statistical appraisal (AVM) or a full appraisal. However, an AVM may not be used to override the value established by the full appraisal.
Do the reserve requirements seem excessive? Maybe. But this is actually one more step to help stop future foreclosures. Please call me at (760)500-1919 or email me should you have any questions or should you think you may be affected by this change.
