Plan to rent out your house?

I’ve talked to several people lately that want to buy a new primary residence and keep their current home as a rental.  The rental market is great right now, and nothing builds wealth over time like real estate so at first glance this is a good idea.  There are, however some financing issues you’ll want to keep  in mind.  As always consult your tax and legal professionals on how you may be affected personally. Thanks to Ann and Mo at Kensington Mortgage Group for the following:

In June of 2008, new requirements were released for borrowers who are purchasing a new primary residence and intend to convert their existing principal residence to a second home or rental property.  We thought it would be important to re-visit the issue again as we are getting many calls around the changes and it could impact your ability to qualify for the new purchase.

In our current market, many borrowers may decide to rent their current home versus selling it.  In the past, the rules regarding this type of transaction would allow for 75% of the rental income, verified by a lease, to be used to offset the payment on the current home.  While the 75% rule is still in place, there are additional caveats that impact the ability to use this income and additional requirements surrounding the lease.

New Criteria for Conforming Loans:
1-75% of the rental income may be used to offset the mortgage payment on the current home if there is documented equity of at least 30% in the existing property (FHA allows the equity position to be 25% versus 30% for Freddi Mac). The equity position is determined by an appraisal. Some will say that an AVM or BPO is acceptable (Asset Valuation Management and Brokers Price Opinion). We would not advise using this as lenders, in the end, are really asking for an appraisal.

2-The rental income must be documented with a fully executed lease agreement and the receipt of a security deposit from the tenant and proof of the deposit into the borrower’s account.

3-If the 30% equity in the current home cannot be documented, both the current and proposed mortgage payments must be used to qualify the borrower for the new transaction AND 6 months of PITI for BOTH properties is required in reserves.

IT IS IMPORTANT TO NOTE THAT IF THE BORROWER HAS HAD THE HOME LISTED FOR SALE AND THEN DECIDES TO RENT IT, THE LIST PRICE WILL INFLUENCE THE UNDERWRITER EVEN IF THE EXISTING HOME APPRAISES FOR A HIGHER AMOUNT THAN WHAT THE BORROWER HAD THE HOME LISTED.