Before You Advise Your Clients Rent Their Current Home And Buy Another One, You Need To Know This!
Phil Caulfield is one of my favorite loan officers on AR. He's always on top of his game and is constantly sharing the latest changes that will affect your real estate transactions. This post is just another great example of Phil's professionalism and attention to detail. I just ran into this situation this week with one of my new clients and had to show the agent the new rules in writing to prove I wasn't making them up. The mortgage lending world is going through a major overhaul and it will continue to get more restrictions like this one until the government is fully satisfied that it has protected the consumer and itself from fraud and further losses. Hang on to your hats folks, the ride is not over yet. More changes and restrictions are due in the near and distant future.
When someone buys a home before selling their current home, they may have a problem: if they have a mortgage on the old home, that debt is included in their debt-to-income ratio.
In the old days (pre-2008), home buyers who did not sell their home first had at least a couple of ways to offset their mortgage debt.
Some lenders would accept the income reported on a rent survey prepared by a licensed appraiser. Other lenders would accept a rental agreement.
The lender would subtract 25% of the income obtained by either of these methods off the top to account for expenses and vacancy. They would then subtract out the PITI (principal, interest, taxes, and insurance). If there was a positive balance left after this calculation, it was added to the homebuyer's income. If there was a negative balance, it was added to their debts.
Most lenders still use this method to calculate the positive income or negative debt. Now, however, there is a twist. You need to be concerned with the amount of equity in the old property. In addition, more documentation is required for rental income to be included.
Fannie Mae now requires the following documentation to use rental income from a primary residence converted into a rental property:
- An executed lease agreement
- receipt from the tenant of a security deposit
- supporting documentation of deposit of the security deposit into the homebuyer's account
These documents seem to make sense. However, what happens if the sale falls apart? Hopefully the rental agreement has a contingency for this so the homebuyer doesn't have to move out if his purchase doesn't happen.Here is the part that has changed that really can be the deal-killer, especially in this market: the homebuyer must have 30% equity in their current home in order to use the rental income. If they do not have 30% equity, even if they have satisfied the conditions above, they must include the PITI on the old home as a debt with no rental offset!Why, you may ask, is 30% equity required to use the rental income? Fannie Mae is worried about buying and bailing. Buying and bailing means buying a new home while your credit is good, and then walking away from the loan on the old home.My guess is that Fannie Mae has an interest in such a large percentage of homes, this is how they keep people in the homes with a low percentage of equity. If they can't qualify, they are less likely to bail!Fannie Mae now requires an appraisal on the current home that is no more than 60 days old at closing to determine if the homebuyer has 30% equity in the current home.It's critically important for both loan originators and real estate agents to stay on top of current guidelines. By the way, did you know that starting on December 12th (tomorrow) Fannie Mae is reducing their maximum debt ratio from 55% to 45%?
Comments(5)