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

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

Petrified Forest

Last week I started on a series of blogs to go over the nuances of underwriting where a home owner can purchase another home to be used as their primary and turn their current home into a rental or second/vacation home.

The national news outlets have reported this week that according to the S&P/Case Shiller house price report the market has seen a slight increase in home prices month over month, however home prices are still about 4% below where they were last year.  One month does not a trend make, but it's better than another down report.

Interest rates are still near the lows for 2011 and with a perception that home prices may be on the rise hopefully we will see an increase in the purchase market real soon.  With the market news as a backdrop, maybe more buyers with means will be exploring the purchase of a new home even if they currently own one they can not or do not want to sell.

As promised, I will be detailing the underwriting guidelines for the conversion of a primary residence to one of the four primary groups.  Keep in mind that in all cases the transaction must be a purchase and the borrower must be 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. 

Last week I wrote about group 1 - Principal residence in pending sale status.  Today let's examine group 2 - the case of a current residence that is being retained by the current owner, converted to a second or vacation home and the guidelines that must be met to purchase another home.  This situation arises most often when a buyer is relocating from another state and wants to retain their current home to go back to for visits or to live in part of the year when the weather is good.  Got to love those "Snow Birds", especially here in Arizona.

First a definition:  A second or vacation home is a single family unit, occupied by the owner at least part of every year.  For most lenders the home needs to be located a distance from the primary residence, 100 miles is typical and some require the second home to be in a "Resort" destination.  OK, now to the specific guideline issues.

•·          If the current owner is converting their current principal residence to a second or vacation home status, then both the current and the proposed mortgage payments including taxes, insurance and HOA fees are used to qualify the borrower for the new transaction and must be 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.  Reduced reserves of two (2) months PITI reserves for each property may be considered 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.

Just like the principal residence in pending sale, buying a new home and retaining the current as a second or vacation home isn't easy but it can be done.  Of course all of the other guidelines must be met as well. 

Next week I will go over Group 3 - Principal Residence converting to an Investment Property under Fannie/Freddie Guidelines.  So stay tuned for the next thrilling episode in the series. 

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.

By the way all the pictures I use were taken by me and may not be copied, used or distributed without my express permission.  Today's was taken this spring on a trip up to the Petrified Forest National Park in northeast Arizona.

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

Comments (6)

Tanya Van Blake-Coleman
Van Blake-Coleman Realty, St. Thomas/ - St Thomas, VI
Improving the Quality of Your Life

All good things to consider. Great post.

Jun 29, 2011 10:15 AM
John Saari
Worcester, MA
"The Mortgage Buddy"

Nice post and very detailed. Thank you for the information.

Jun 29, 2011 10:35 AM
David A. Weaver
Peoples Bank & Trust Co. - Scottsdale, AZ
24 years helping folks finance their dreams.

Thank you Tanya.  If you have a buyer who can't sell because they are underwater, you might explore with them the possibility of buying and retaining the current residence.  Just another way to create business in today's market.

Jun 29, 2011 10:36 AM
Deb Brooks
Brooks Prime Properties Wichita Falls Texas - Wichita Falls, TX

David, your posts are great! I just subscribed to your blog. KEEP WRITING!


Jun 30, 2011 06:35 AM
David A. Weaver
Peoples Bank & Trust Co. - Scottsdale, AZ
24 years helping folks finance their dreams.

Hi Deb,  Thank you for the kind words.  I plan on it.

Jun 30, 2011 06:59 AM
David A. Weaver
Peoples Bank & Trust Co. - Scottsdale, AZ
24 years helping folks finance their dreams.

Hi John,  You are quite welcome.  Next week I'll go over the conversion to a rental under Fannie/Freddie guidelines.  Can you handle the anticipation?  :<)

Jun 30, 2011 07:01 AM