Use rental money from your home to pay for another.
What are some of the things to know if I want to rent my house and buy a second home? It’s always breaking news when the process of applying and qualifying for a new home mortgage gets easier even if there are house payments being made on another. Fannie Mae announced homeowner-friendly regulatory changes in home buying guidelines earlier this summer effective August 15, 2015.
A change in qualification requirements and documentation procedures for certain types of mortgage loans, such as the purchase of a second home while keeping the current one, resulted in a simpler way to determine mortgage pre-approval. The latest regulations are already having a positive impact in the Nevada housing market.
Keep Your Current Home Even When You Buy Another
New Fannie Mae directives affect the conversion of a primary residence to a rental home. The information is of particular interest to potential second home buyers, possible renters, and anyone working in the field of real estate and mortgages. Qualifying for a new home is less complex for anyone wanting to rent out their existing home rather than selling it.
Fannie Mae’s previous mortgage home rules required at least 30% documented home equity when the owner vacated the home before they were considered a potential conversion candidate able to rent that home and get credit for it. The sharp rise and swift decline in property values made it difficult to find qualified owners with positive equity in their home. Consequently, both the old and new mortgage payments were included as expenses on loan applications. Mortgage pre-approval was difficult to get due to the required exclusion of verified rental income.
The equity requirement has been eliminated so that a significant portion of the rental income can be included. It reduces the amount of paperwork required for a loan application. It particularly helps the estimated nine million American homeowners underwater on their current home in cities like Las Vegas. Here’s how the new change present the opportunity to purchase a new home while keeping current property.
Conversion of Principal Residence to Rental Property
The height of the financial crisis resulted in financial requirements for principal residence conversion that proved financial ability and equity of borrowers to show they could manage multiple properties. Now convert your current residence into investment property regardless of equity. If someone takes you up on your offer to “rent my house” the rental payments will help cover its mortgage. You may only need to contribute supplemental payments for property taxes, annual insurance, HOA fees, and the balance of the monthly mortgage payment.
Reserve Requirements Eliminated
Clients must still qualify for the new primary residence. A significant change is the elimination of reserve requirements effective August 15, 2015. Former rules required a minimum reserve to cover six months of payments to cover taxes, insurance, interest and principal. Now it is just a matter of demonstrating the ability to pay both mortgages.
Get Rental Credit for Home Mortgage Loan Qualifying Income
Owners now get 75% rental credit towards reported qualifying income for the new purchase, reducing their debt to income (DTI) ratio. The remaining 25% is considered a vacancy factor that allows for time between tenants, and cannot be included in qualifying income. Borrowers can now:
- Buy and live in a new home.
- Maintain ownership of the current property while renting it out.
- Get an income credit added to their qualifying income for a new mortgage.
Stipulations on the inclusion of rental income are:
- Rent cannot come from family members.
- There must be a signed rental agreement for a period of at least one year.
- The security deposit for the rental must be in the owner’s account.
Easier Qualification with Less Paperwork
As mentioned earlier, borrowers must still be able to show the ability to qualify for the mortgage home loan, including documentation of credit history and rental income. Low interest rates from certain Fannie Mae programs increase the likelihood of approval. Lenders will use a manual application for loan case files submitted to Desktop Underwriter ® (DU®).
Applications will include the standard rental income and financial reserve requirements when a principal residence is converted to an investment property. Required funds are far less than the amount required under the previous regulations.
The change makes it easier to qualify for a loan. Borrowers have less paperwork to fill out for the loan process. Fannie Mae has provided a win-win situation!