With the current market conditions where most properties have declined in value since the time that they were purchased. Many potential Sellers are choosing not to sell their properties until market conditions improve, and instead rent out their current property and purchase another. However, taking this route is not as simple as it sounds, so Homeowners who are contemplating doing that need to be aware of the financing guidelines before they embark on down that path.
Certainly it is the right of any Homeowner to rent out there property if they choose to, but will they be able to use the rental income from the existing property that they will be renting to qualify to purchase another property? Both Conventional and FHA Guidelines allow for a Homeowner to rent out their property and use the rental income to qualify to purchase another property, but there are stipulations.
The stipulations for using rental income to qualify for the purchase of another property differ between Fannie Mae (Conventional Loans) and FHA, so I will cover their guidelines in two separate blogs. In this blog I will provide Fannie Mae's guidelines on the use of rental income.
Currently Fannie Mae does not have a time period for when rental income can be used on a investment property (non-owner occupied). BUT, and this is a BIG but, many Lenders will not allow the use of rental income, unless the Non-Occupant Homeowner (investor) has two (2) years of managing rental properties. So it is very important to check with local Lenders, before assuming that the Fannie Mae Guidelines will apply.
Below are the current Fannie Mae Guidelines if the current home is going to be converted from a Principal Residence to an Investment Property:
- Fannie Mae will permit up to 75% of the rental income to be used towards qualifying for the new mortgage payment if there is documented equity of at least 30% in the existing property. The documented proof of equity required is usually in the form of an appraisal.
- Plus 6 months of reserves for Principal & Interest, Taxes & Insurance (PITI) for both properties. Fannie Mae will allow Lenders to reduce the 6 months reserves to 4 months if there is proof of 30% equity in the existing property.
- Plus the rental income must be documented with a copy of a fully executed lease agreement, the receipt of a security deposit from the tenant, and proof that the security deposit has been deposited into the Borrower's account.
- If the Borrower cannot provide proof of 30% equity in the existing property, then the rental income cannot be used to qualify for the mortgage on the new property.
- Also the 6 months PITI on both properties cannot be from gift money.
In the next blog I will provide the FHA Guidelines if the current home is going to be converted from a Principal Residence to an Investment Property.
*************************************************************************************
Info about the author:
George Souto is a Loan Officer who can assist you with all your FHA, CHFA, and Conventional mortgage needs in Connecticut. George resides in Middlesex County which includes Middletown, Middlefield, Durham, Cromwell, Portland, Higganum, Haddam, East Haddam, Chester, Deep River, and Essex. George can be contacted at (860) 573-1308 or gsouto@mccuemortgage.com
Comments(13)