Monday, November 12, 2012 - Article by: Joe LaVallie - HomeStreet Bank -
How does having a rental property effect qualifying for a new mortgage? There are two different situations that can occur: #1 You convert your existing owner occupied property into a rental and #2 you have an existing rental that is documented on your tax return.
Fannie Mae will continue to permit up to 75 percent of the rental income to be used to offset the mortgage payment in qualifying if there is documented equity of at least 30 percent in the existing property (derived from an appraisal OR AVM, minus outstanding liens).
The rental income must be documented with:
o a copy of the fully executed lease agreement; and
o the receipt of a security deposit from the tenant and deposit into the borrower's account.
If the 30 percent equity in the property cannot be documented, rental income may not be used to offset the mortgage payment.
o Both the current and the proposed mortgage payments must be used to qualify the borrower for the new transaction; and
Reserves required: Per DU, or manual underwriting calculation
For FHA loans:
When converting a principal residence to a rental unit, rental income may only be used to qualify
under the following two circumstances:
When converting a principal residence to an investment property, documented equity of at least 25 percent in the existing property is required to use 85 percent of the rental income to offset the mortgage payment in qualifying. Equity can be documented by a current appraisal (less than 6 months old) or by comparing the unpaid principal balance to the original sales price. The appraisal may be either a 1004, 2055 or 1073 form.
Rental income may be used for borrowers relocating with a new employer or being transferred by a current employer to an area not within reasonable commuting distance. A properly executed rental agreement for at least one year after the loan is closed is required along with evidence the security deposit and first months rent was paid to the borrower
As you can see, when you convert an existing primary residence to a rental property the requirements for purchasing a new property are tough to meet. Make sure you understand the requirements before embarking on your new career as a landlord.
The Integrity Team
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