I have clients all over the northern Virginia area. Recently two similar calls from clients that live in Alexandria and Vienna . Both had a question about keeping their current home as a rental when buying  another primary home.  As simple as this question may seem, it is much more complicated when trying to qualify for a mortgage carrying two mortgages. Fannie Mae and Freddie Mac have specific language for how much equity is needed in order to not count a current mortgage payment.

Fortunately both had the required equity in their current homes to avoid having to qualify carrying two mortgages. Other clients I have spoken to were not so lucky. The value of their home dropped to much and they had a big decision, sell or stay. What is the correct answer? Well that answer differs with every client I talk to. Below are the current Fannie Mae guidelines for converting a primary home to an investment home.

Borrowers who currently own their home typically have three options when they decide to purchase a new principal residence. The borrower can:

1. Sell the current residence and pay off the outstanding mortgage,
2. Convert the property to a second home, assuming they can qualify with both the existing and new mortgage payments, or
3. Convert the property to an investment property and provide documentation that they will rent the property and use the income to offset the mortgage payment.

On a primary home conversion to an investment property 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 (equity is determined from an appraisal, Automated Valuation Model, or Broker Price Opinion, then minus current value of the mortgages against the property).

The rental income must be documented with:

1. A copy of the fully executed lease agreement; and
2. 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. 

Both the current and the proposed mortgage payments must be used to qualify the borrower for the new transaction; and

Six months of Principle, Interest Taxes and Insurance for both properties is required to be in reserves after closing. In today’s real estate market, this is where most borrowers get caught. Being able to save for the down payment, closing costs and have six months mortgage payment for two homes is typically too much for most borrowers to over come.

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