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

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

Cactus Flower

Pink Blossoms on this Desert Cactus

Two weeks ago I started on a series of blogs to go over the nuances of the underwriting guidelines 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.

Davis Calls U.S. Housing Market `Dead Spot' in Economy, these comments were made this morning on Bloomberg.  Interesting, but we still have to make a living and work the market we have.

The good news is that interest rates are still near the lows for 2011 and hopefully we will see an increase in the purchase market real soon.  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. 

As stated in my blogs 1 & 2 the four groups 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. 

This week I will go over group 3 - Current principal residence is converting to an investment property - Fannie/Freddie guidelines.  This is the situation I see the most often in our Arizona market.  It arises most often when a buyer currently owns a home that they owe more than the current market value.  They cannot sell or refinance without writing a huge check or harming their credit. 

They idea is that if they can purchase a new residence at today's deep discounts and rent their current home out, when housing price appreciation returns it will reduce the loss on their current home and give them a gain on the new one.  So eventually if you look at the value of the two properties together they will come out whole a lot sooner than if they just stay put.

For example in Buckeye, there are two subdivisions within two miles of each other, Sundance and Verrado.  Sundance, although a nice community, is not quite on par with Verrado.  In Sundance a 2500 sq ft, two story, 5 br, 3.5ba home sold for $320K in 2006.  That same home can be purchased today as a REO for $98K.  In Verrado a 3460 sq ft, two story, 5br, 3.5ba home that sold for $611K in 2006 can be purchased today as a REO for $225K.  If the home owner can afford it making the move should make sense in the long run when the market recovers.

Due to the drastic reduction in home prices and high demand for SFR rentals in so many markets, one can see why there is so much interest in this approach.  OK, now to the specific guideline issues.

•·          If the current owner is converting their current principal residence to an Investment Property, they may use up to 75% of the gross rental income less outstanding liens, taxes and insurance for qualifying if the current principal residence has a least 30% equity (it could happen) documented by a full appraisal or AVM.  The appraisal or AVM must be dated within sixty (60) days of the Note date.  A BPO is not allowed.  If the borrower wants to finance using an ARM product on the Agency Conforming or Agency High Balance program only a full appraisal or 2055 may be used to document the equity in the current principal residence.

•·           The rental income must be documented with:

•·    A copy of the fully executed lease agreement.  A family member, any individual with an established relationship with the borrower or an interested party to the transaction cannot sign the lease agreement as the tenant.

•·    The receipt of a security deposit from the tenant and deposit into the borrower's account is also required.

•·          If 30% equity in the property cannot be documented, rental income may not be used to offset the mortgage payment.  Both the current and the proposed mortgage payments must be used to qualify the borrower for the new transaction; and six (6) months PITI reserves are required for both properties.

•·          If the property being retained as an investment is a multi-unit property and the borrower is vacating on unit, rental income may be used for the other units if the income is verified by Schedule E, regardless of the equity position.  To give rental income to the unit currently occupied by the owner, they must have 30% equity in the property.

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 in group 2 where the current principal residence is being retaining as a second or vacation home, the guidelines are similar.  Of course all of the other guidelines must be met as well.  By the way these are the guidelines I offer, different mortgage companies or institutions may have similar guidelines or they may be different as they are adjusted to meet specific market risks.  These adjustments are called overlays.  Always check with your mortgage professional for details.

Next week I will go over Group 4 - Principal Residence converting to an Investment Property under FHA Guidelines.  So stay tuned, the final episode is next week.

If you are a Realtor representing a buyer or 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 are an owner of 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 not 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 morning in my front yard.  This little cactus blooms a couple of times a year but not always as nice as this.

Please call me at my new number 602-245-4288 or email me at

Comments (3)

Laura Higginbotham
Arizona Real Estate Options - Mesa, AZ
Broker/Real Estate Consultant, Mesa, Arizona Home

These options are becoming more important to those who would like/need a new home but feel they cannot get out of their underwater situations. Thanks for the great posts. I will go back and read the others!

Jul 07, 2011 09:19 AM
David A. Weaver
Peoples Bank & Trust Co. - Scottsdale, AZ
24 years helping folks finance their dreams.

Hi Laura,  Thanks for the kind words.  I think this is a strategy that may be used more and more as our economy and home prices stabilize.  Basically the sum value of the two properties should bring you out from underwater much faster than is you wait for appreciation and principal reduction through payments alone.  Glad to help in any way I can.

Jul 11, 2011 07:10 AM
Jim Frimmer
HomeSmart Realty West - San Diego, CA
Realtor & CDPE, Mission Valley specialist

With interest rates at record lows, and expected to stay there for another year, I wonder what there is left to help improve the economy.

Sep 03, 2011 02:55 PM