Many buyers are choosing to retain their current residences and turn them into rental properties. Ideally, the rent received will be enough to cover the mortgage payment if not more, and in the long run the buyer will enjoy appreciation on the property as well. As far as qualifying for their home purchase, lenders would typically accept 75% of the new rent to help offset the mortgage payment of the retained property instead of counting the entire payment against their debt to income ratios.

Big change to FNMA guidelines: The underwriter must now obtain a statistical appraisal (also known as an AVM) on the borrower’s current residence to determine the percentage of equity in that property. If the borrower has a minimum of 30% equity in the current residence, then normal underwriting guidelines apply. However, if it is determined that the borrower has less than 30% equity in the retained home, the entire mortgage payment, including taxes and insurance, will be counted against them, regardless of down payment on the new home, credit, etc. This can be a deal killer.

Unfortunately, there have been many buyers that provided fake lease agreements so that they could buy their next home, wrongly assuming that the home would rent quickly. After a few months of the retained property sitting vacant, the mortgage payments still being due, and a depressed real estate market, some of these folks chose to walk away from the old home.

If you have a client that plans to rent out their current home and needs that income to qualify, run comps on the retained property to be safe. You do not want to wait until after you already have an accepted offer to find out they do not qualify. This guideline change is affecting almost all conventional loans including Conforming, Conforming Plus, and true Jumbo even though Jumbo loans are not insured by FNMA. Not the greatest of news, but in the long run this can help in the effort to reduce loan defaults.

Should you have any questions especially if you have a client that might be affected by this change, please feel free to call (760)500-1919 or email me.

And remember to always get your clients pre-approved not just pre-qualified.