Buying Before Selling?: Know the New Rules
Often, a buyer wants to purchase a new home prior to selling their prior residence. They may plan to rent the prior home, and assume that they can use the rental income to offset the mortgage payment. Recent changes have been enacted by *both* Fannie Mae and FHA regarding the use of rental income from prior residence in qualifying for a new home. Freddie Mac is widely expected to follow these rules shortly, and most lenders have already implemented the new rules regardless of Freddie’s delay.
A new trend has been seen in homebuying - called “Buy and Bail” - where homeowners upside down in their own homes decide to purchase a new home, often right down the street or perhaps closer to work, at a significantly lower price than their current residence - with a plan to let their original home be foreclosed after they have moved out of it. Obviously, this is not good for the overall industry, and that’s why these new rules were enacted.
Fannie Mae’s New Guidelines:
Fannie Mae has issued the following requirements for a borrower to use rental income on the property they are vacating to offset the mortgage payment:
- The borrower must provide a fully executed lease agreement covering a 12 month period AND receipt of security deposit from the tenant along with proof of deposit into borrower’s account.
- Must document 30% equity in the property being vacated. Acceptable documents are AVM, Appraisal or BPO.
If both of these requirements can be met, use 75% of gross rental income to arrive at rental income.
If sufficient equity in the vacated property cannot be documented, the rental income cannot be used to offset the mortgage payment. The borrower will have to qualify with both the current and proposed mortgage payments (PITI).
FHA’s New Guidelines:
For FHA: HUD has issued a Mortgagee Letter 2008-25 to revise their underwriting requirements for borrowers who are converting their primary residence into a rental property. Beginning with case numbers assigned on or after September 19th, the underwriting analysis may consider rental income from the property being vacated if the following requirements are met:
- Relocations - Homebuyer is being relocated by existing or new employer to a location that is not a reasonable commuting distance.
OR
- Must document 25% equity in the property being vacated. Acceptable documentation includes current appraisal, or comparison of the principle balance to the original sales price.
- The borrower must provide a fully executed lease agreement covering a 12 month period AND receipt of security deposit from the tenant along with proof of deposit into borrower’s account.
What does it mean to you?
Again again, more than ever, it’s imperative that you have your borrowers talk to a mortgage professional early in the home shopping process. Many borrowers with excellent credit just assume that they can rent out their prior home and buy a new one - without understanding that things have changed in the lending world. Atlanta Home Loans are becoming more challenging to come by each day. Ensure that you are working with an Atlanta Mortgage Lender who is staying on top of the quickly changing financing landscape.