Due to FHA's concern that some homebuyers in these transactions may attempt to provide misleading information regarding the rental income of the property being vacated to qualify for the new mortgage, FHA is instituting underwriting guidance designed to assure that the homebuyer can make payments on the full debt service of both mortgages. As a result, FHA issued a new mortgagee letter to discuss the major changes to this issue:

08-25 Converting Existing Homes to Rentals--Underwriting Instructions_0

The exclusion of rental income from property being vacated is being instituted on a temporary basis while FHA further analyzes this situation to determine whether permanent measures may need to be taken.  This will assure that a homeowner either has sufficient income to make both mortgage payments without any rental income or has an equity position not likely to result in defaulting on the mortgage on the property being vacated.

THERE ARE 2 EXCEPTIONS:

RELOCATIONS: The homebuyer is relocating with a new employer, or being transferred by the current employer to an area not within reasonable and locally recognized commuting distance.  A properly executed lease agreement (i.e., a lease signed by the homebuyer and the lessee) of at least one year's duration after the loan is closed is required.  FHA recommends that underwriters also obtain evidence of the security deposit and/or evidence the first month's rent was paid to the homeowner. 

SUFFICIENT EQUITY IN VACATED PROPERTY:  The homebuyer has a loan-to-value ratio of 75 percent or less, as determined by either a current (no more than six months old) residential appraisal or by comparing the unpaid principal balance to the original sales price of the property.  The appraisal, in addition to using forms Fannie Mae1004/Freddie Mac 70, may be an exterior-only appraisal using form Fannie Mae/Freddie Mac 2055, and for condominium units, form Fannie Mae1075/Freddie Mac 466.

Beware....this is a huge change.  FHA is the wave of at least the near future, but you need to beware if the sellers are planning on keeping their home.