How to get out of your underwater house and live to tell about it!!!!!

Mortgage and Lending with Peoples Bank & Trust Co. NMLS #228406

Model HomeOver the last few months I have gotten an increasing number of phone calls and emails wanting to know the process where a home owner can purchase another home to be used as their primary and turn their current home into a rental.

In the Arizona market, home prices have plummeted; for example a home in the West Phoenix Valley that sold in the mid $400K's in 2006 can now be bought for under $150K in 2011.  The same holds true for California, Nevada, Florida or any market that has experienced the rapid decline in home prices.  They are candidate for this type of activity.

The rental market is strong in Arizona as there are many, many families who have lost their homes to foreclosure who do not want to rent an apartment, so single family rental homes are at a premium.  As I suspect is the same in the other hard hit markets.

As real estate is as affordable as it has been in decades and a strong demand for rental homes, it is not unexpected that a home owner who is underwater in their current residence but who makes good money would think about moving up, out or sideways.

So over the next few weeks I will post the underwriting guidelines for this conversion for the four primary groups.  In all cases the transaction must be a purchase and the borrower is either selling or retaining his current principal residence. 

They are 1.  Principal residence is in pending sale status, 2.  Principal residence is converting to a second or vacation home, 3.  Principal residence is converting to an investment property under Fannie/Freddie Guidelines, and 4.  Principal residence is converting to an investment property under FHA Guidelines. 

Today let's examine the case of a current residence that is in pending sale status and the guidelines that must be met to purchase another home:

•·          If the current principal residence is pending sale but the transaction will not be closed (with title transferred to the new owner) prior to the close of the new transaction, then both the current and the proposed mortgage payments are used to qualify the borrower for the new transaction and included in the debt to income ratios.

•·          The borrower will also need to be able to provide documentable funds representing six (6) months PITI reserves for both properties.  Two (2) months PITI reserves for each property are permitted provided borrower's current primary residence has at least 30% equity, minus outstanding liens, that is documented by a full appraisal or an Automated Valuation Method (AVM).  The appraisal or AVM must be dated within sixty (60) days of the Note date.  A Broker Price Opinion (BPO) is not allowed.

•·          The full PITI of the borrower's current residence does not need to be included in the debt to income ratios if there is an executed sales contract on the current residence and all contingencies have been released.  A copy of the prospective buyers' lenders' commitment letter and/or approval letter showing that there are no outstanding approval conditions preventing the new buyer from completing the sale is required to be in the file.

As you can see it isn't easy but it can be done.  Of course all of the other guidelines must be met as well.  So stay tuned for the next thrilling episode in the series where we explore converting a primary residence into a second or vacation home.  Can you stand the wait and anticipation?  ZZZZZZZ  :<)

If you are considering purchasing a home in Arizona or any where in the US and want to be sure you are mortgage ready, I will be happy to help you!  It's much better to know than to guess in today's market.

If you own a primary residence, second home or investment property, I can provide you with a no-cost mortgage review to help you to determine if refinancing may be in your best interest.  Interest rates are at their 2011 lows but will not stay there forever.  Avoid future regret by missing out on this opportunity.

Please call me at                 602-920-4765          or email me at

Comments (7)

Mary Ellen Holleran
Holleran Real Estate - Chapel Hill, NC

This is a great post! I don't live there but if I have clients moving, I'm sending them your way.

Jun 22, 2011 02:30 PM
Melba Baquero
Melba Baquero, Ascent Home Loans - Temecula, CA

Excellent post David!  There are many ways to succeed if you're willing to roll up your sleeves and do the work!  Like Mary, if I have any clients in your area, I'll definitely be sending them your way!

Jun 22, 2011 02:41 PM
Endre Barath, Jr.
Berkshire Hathaway HomeServices - Beverly Hills, CA
Realtor - Los Angeles Home Sales 310.486.1002

David how valuable information, if you were an attorney you could charge for this. More people need to hear about this.

Jun 22, 2011 04:48 PM
Fred Griffin Florida Real Estate
Fred Griffin Real Estate - Tallahassee, FL
Licensed Florida Real Estate Broker

Greetings from Florida, David. 

I have seen some markets in my State plummet 75%.   And, I have family in Scottsdale AZ; they can echo what you are saying.

What a great Blog with good information - thanks for Posting It!

Jun 22, 2011 05:00 PM
David A. Weaver
Peoples Bank & Trust Co. - Scottsdale, AZ
24 years helping folks finance their dreams.

Wow, Thank you all for your kind words.  First blog ever, anywhere, guess I'll do it again!

To Mary and Melba, I would be honored to work with your clients.  I am able to offer financing nationwide not just in Arizona, so give me a call or email and let's talk.

With the new housing sales numbers and unemployment numbers that came out this morning not looking to sparky, I think it is important to realize that it is not all doom and gloom out there.

If you know the rules (guidelines) you can create niche markets regardless of the economic times you find yourself in.

Thank's again.

Jun 23, 2011 05:23 AM
Stephen Howell
Coldwell Banker Residential Brokerage - Annapolis, MD
Annapolis MD Homes For Sale 443-994-8043

Conversion of primary residences to rental property has many different considerations.  There are the obvious tax considerations having to do with capital gains (hmmm, underwater home, probably no gain).  There are IRS rules regarding renting homes over the long term, the most interesting one could be a 1031 Exchange in the future were there to be appreciation in the homes value where the owner when selling could face substantial tax consequences resulting from the sale.

But the elephant in the room that no one seems to address when leaving one home for the next and deciding to rent it rather than sell it, is determining if the market rental rates will cover the mortgage and maintenance costs and HOA/Condo fees depending on the community the home is in.  It might very well make sense to lease out a property for $1800/month, but, if your combined payment is $2000/mth, then you've got a monthly loss of $200.  While that might not seem significant at first, it will add up.

The reason that owners consider renting the "old homestead" is that they cannot sell the home for what its worth, or worse they are struggling to cover the current mortgage payment.  Defaults on rental properties could be a significant and toxic side effect.

Jun 28, 2011 01:31 AM
David A. Weaver
Peoples Bank & Trust Co. - Scottsdale, AZ
24 years helping folks finance their dreams.

Stephen, Thank you for adding your insights.  You bring up some valid and thought provoking points.

One in particular is the mind set.  I find that most of those inquiring are looking to cut their losses by buying a new residence at a deep discount and counting on its appreciation to make up for the loss on their current residence.

They figure as the original homes value increases coming closer to break even, the new house is appreciating over purchase price so on balance over time they may cut their overall loss, break even or maybe have a little combined positive equity.

Time will tell.

Jun 28, 2011 09:57 AM