Effective tomorrow (August 1, 2008) borrowers who convert their existing residence to an investment property or second home will be treated to tougher standards if they’re using a Fannie Mae loan. Here are the new requirements:
Converting existing residence to a “second home”.
- Borrower must qualify for both payments (this is not new).
- Unless the borrower has at least 30% equity in the existing property, they will need 6 months PITI for both properties in reserves.
Converting existing residence to “investment property”
- The borrower may only use rental income (75% credit) of their existing property if they have at least 30% equity in the property. Otherwise, they must qualify with both full payments (no credit for rent).
- Rental income must be documented with a fully executed lease agreement and a receipt showing the security deposit from the tenant has been deposited into the borrowers account.
- If the borrower does not have 30% equity in the proposed investment property (former residence) then they will need 6 months PITI for reserves for both properties.
Either an appraisal, AVM or Broker Price Opinion is used to determine if there is 30% equity in the existing home that is being converted to a second home or investment property (this may be determined by underwriting).
Last, be careful when reading guideline changes, such as this. Underwriting guidelines and loan programs are changing constantly, post like this are quickly “dated material” and no longer applicable–do verify information you find on the internet with your Mortgage Professional to make sure the information is still valid.
Rhonda –
Do you have a good handle on the changes to the tax implications for non-owner-occupant property?
biliruben, I’m trying to keep up with the constant mortgage changes so I would feel better having a CPA respond (my long way of saying “no”).
biliruben, I just came across this:
From this article (which also has good information on the “tax credit”.
Thanks, Rhonda.
On converting an existing residence to investment property, my understanding is that if it is rented out for 6+ months, then the 30% equity requirement not longer applies (but the 75% rent credit does) when applying for a loan to purchase a new principal residence.
I believe you’re correct, Anon. (Sorry for my late reply).
Anon,
This is my understanding on this.
If you are leaving your primary res you will need 30% equity with proved with a drive by appraisal to use 75% of proposed new rent/lease income regardless if it has been rented for 6 months because underwriters now want to see income showing up on tax returns before you can get any credit if you have less than 30% equity. If one does not have the 30% equity than plan on qualifing with both payments
Chris, it may not be just a drive by, the underwriter could call for: an appraisal, AVM or Broker Price Opinion (as stated in my post). It’s the lender/underwriter’s call. And…Anon’s talking about being out of his residence for at least 6 months.
Can I buy house as a 2nd home, but later convert to investment home?
Pam, it depends when you’re going to convert the property. I believe that Fannie/Freddie’s standard language in the deed of trust is that you intend to occupy the property for at least 1 year. If you’re buying the property intending to have the home be an investment property for less than that time, than it’s probably not really a second home.
The lender/underwriter may determine that it’s not a second home after reviewing your scenario (even if it truly is).
Pam here is some more info from FNMA guidelines.
Second homes must be one-unit properties that are not subject to time-sharing and must meet the following
criteria:
• Property must be in such a location as to function reasonably as a second home (i.e. remote in distance
from the borrower’s primary residence).
• Be suitable for year round occupancy
• Be available for the borrower’s exclusive use and enjoyment
• Must not be subject to any rental pools or agreements that require the Borrowers either to rent the
property or give a management firm control over the occupancy of the property.
And as I said before, it has to pass a “smell test” with the underwriter even if the property meets all the criteria.
Opinion and gut feel are now UW guidelines! does gut have two “T”s
So if we buy this house and use as 2nd home for a year, and rent out, it would not be an investment home. Am I right?
Thanks, Pam
Pam, I highly recommend you run the scenario by your mortgage professional. A home must meet other criteria to meet guidelines of being a second home too which can sometimes wind up being the underwriters call.
I will seek advise from them. Thank you Rhonda.
I once had a transaction where the home owners lived in Alaska and bought a home in Des Moines WA. The underwriter would not treat it as a second home which floored me…it was not a conventional mortgage…to my knowledge, it was not sold to Fannie/Freddie…however, it passed all the u/w guidelines. The u/w did not believe that the home in Des Moines was going to be used for vacation purposes…she won. (Due to reasons that we had to go through this lender at that time).
I am being told currently – unless guidelines change – we do not have to worry about the 30% equity, so long as we are out of our current primary residence that is being converted to a rental for 6+ months, and we have sufficient income to carry the new house, plus the 25% of the fair market rent of the converted property we don’t get credit for (except, following the filing of a tax return, I think the lenders or at least the particular lender we have in mind, a large national bank, then go by the actual Schedule E figures). Our lender is almost certainly using AVM for rental property value, if they even care about it after 6+ months (a drive by or stop in would be more than welcome in our case, since every Realtor adds at least $25K to their estimate after viewing, and their estimates come in $40-90 over AVM [AVM was recently disclosed to us in the process of refi’ing current mortage with same lender]). If it makes a differnce, we both have ~800 FICOs. – Anon
Thanks for confirming my previous answer…which you all ready did the research on.
Guidelines CAN and DO change often these days…I’ll do my best to stay on top of them here at RCG.
Credit scores do make a difference with all forms of conventional financing.
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