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

Mortgage and Lending with Melba Baquero, Ascent Home Loans

This is an EXCELLENT post by David Weaver of Buckeye, AZ that I felt compelled to re-blog.  One of the keys to surviving and thriving in today's market definitely lies in creative financing.  I, for one, will be looking forward to the next in line in this series...great job, David!

Original content by David A. Weaver 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 (3)

Simon Webster
CRE Credit Services - Plano, TX

Great info!  I wonder what % of home owners that are underwater know this?

Jun 22, 2011 02:57 PM
Patrick White
Home Driven Realty, Inc - Baldwin, NY
Driven to bring New Yorkers home

Good Evening

Thanks for the post. Have a great day

Jun 22, 2011 03:04 PM
Cathy Criado
Criado Realty - San Antonio, TX
Making Real Estate Profitable

Melba - you did a great job of breaking down some complex issues in lending.  Nicely written, great content.  Thanks for sharing.

Jun 23, 2011 02:34 AM