Financing in Hoboken>Question Details

Rick, Both Buyer and Seller in Hoboken, NJ

FHA lending guidelines - offset carry with rental income

Asked by Rick, Hoboken, NJ Mon Feb 23, 2009

I am looking to purchase a house with an FHA loan. I currently own a house that I was looking to either sell (ideal) or rent if I couldn't get a reasonable price in this market, I was originally pre-approved with a contingency to rent at $x or sell house. Recently my pre-approval was amended to only work if I sell my house. The reason I was given is that I since I don't have 30% equity, I can't use the rent to offset the carry on the property that will become rental property. Does anyone know if the 30% is an FHA guideline, or specific to the bank I was working with?
Thanks!

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Hi Rick,
These new requirements are part of what is called a "Buy and Bail" policy. It doesn't matter if you are using FHA or Conforming financing, each has similar guidelines - either 25% or 30% required depending on the program.

This was institued within the last 6 months because a lot of shady characters would get approved for new home and tell the lender they planned to rent the old home out if they couldnt sell it, only to walk away from the old house once they were settled in their new place. Some folks had the best of intentions, but when it took awhile to sell or they had trouble renting it and they had to carry two house payments it became too much to bear and they just let the old home go.

Now to qualify if you don't have that amount of equity in the home you must qualify for BOTH house payments and have 6 mos of both payments in reserve.

It does make it tougher for folks like you to buy a new place, bu I can't say I disagree with the lenders' position on this. They are sick of getting beat up.

Now if you want or need to get into a new home, I have a couple recommendations. First, you could get a co-signer so that you could qualify with both payments. You'd still have to meet the reserve requirement though and the cosigner would be responsible for the new loan just as much as you. Second, you could move out of the current house, live somewhere else for 6 mos and rent out the current home. Once you have had a tenant in the home for 6 mos with a signed lease and you can document through cancelled checks that you've been recieving rent then the home no longer falls under the category of "primary residence converted to a rental" and you then could offset the mortgage with rent.

It's not easy, but if you want to get into a new home you need to prove to the lender that your intentions are pure and you're not going to walk away from the current home.

Best of luck
0 votes Thank Flag Link Tue Feb 24, 2009
The underwriter will take the two year average of total rents minus total expenses (not including depreciation or amortization). Odds are a significant amount of your expense is in depreciation and that would be helpful because you can add that back. Also, if you can prove that some of the deductions on your tax returns was a one time expense (repairs or legal fees), then you can potentially reduce the loss. 75% is only on recent conversion to rental and can only be used if there is documented equity in the property. Let me know if you have any other questions.

Please let me know if you have any additional questions: http://fhamortgageinfo.com/
1 vote Thank Flag Link Wed Jul 22, 2015
The 30% is an FHA guideline. You could go conventional, but you will be required to have 6 month's reserves for BOTH properties. Sit down with a mortgage broker, and discuss your options!

I am a mortgage broker. If I can be of service, please let me know!

Martin Smith

Precision Funding
877-238-6324 Ext 704
513-536-7184
877-238-6324 FAX
MSmith@PrecisionFundingUSA.com
http://www.PrecisionFundingUSA.com
1 vote Thank Flag Link Tue Feb 24, 2009
Not to be picky, but the FHA underwriter side of me insists on precision.

As stated by several posters below, 30% equity is required for Conventional Loans. 25% equity is required for FHA insured mortgages. These are national guidelines carved in stone. A demand for 30% equity for an FHA insured loan is MORE RESTRICTIVE than required by the Federal Housing Administration.

Two key questions:
Q1: Does the lender you are working with employ one or more Direct Endorsement (DE) FHA Underwriters? If not, this indicates you are working with a Loan Correspondent (either Supervised or Non-Supervised). If so, the sponsoring Mortgagee for your lender may have have imposed tighter guidelines on your lender than would be imposed by working directly with an FHA Mortgagee.

Q2: WHEN did this issue arise? In underwriting or in the interview with the loan originator? If the issue arose in underwriting, that is a clear sign the loan originator has less competence than required to accomplish the job.
1 vote Thank Flag Link Mon Feb 23, 2009
Rick,

The FHA Guideline is 25% .... was introduced by HUD effective September 19,2008

Here is a link to the announcement on HUD's site

http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/fi…

Fannie Mae requires 30% Equity , to allow rental income to be utilzed for qualification purposes, when converting an existing primary residence into a investment property. Here is a link to an article i wrote on my blog regarding these changes

http://mortgagebloke.wordpress.com/2008/10/06/the-accidental…

Call /email me with questions and/or concerns

Jaspal Chhachhi
Sr. Mortgage Consultant
East Coast Capital Corp

T : (646) 657-1858
F: (212) 202-6165
E: jchhachhi@eastcoastcap.com

Web Reference: http://www.mortgagebloke.com
1 vote Thank Flag Link Mon Feb 23, 2009
Franscesa,

The 30% Equity is a FHA requirement. I've seen lenders like Flagstar add their own requirements, like 12 months reserves, for FHA.

The 6 Months PITI for conventional is also Fannie.
0 votes Thank Flag Link Wed Feb 25, 2009
Marty,

My thoughts exactly. Remind me again who is it that is requiring the 6 mo reserve? Banks or the government?

Thanks!

Francesca
Web Reference: http://www.PatrizioRE.com
0 votes Thank Flag Link Tue Feb 24, 2009
Rick,

The 30% equity requirement is an industry change across the board and not specific to FHA lending requirements or the particular bank you were working with.

Given this information please let me know if you would like a free CMA for your property. Just send me an email with your property details or fill out the request through HomeGain.com if your property is located in Hoboken or downtown Jersey City.

Regards,
Jason
Web Reference: http://www.HomeGain.com
0 votes Thank Flag Link Mon Feb 23, 2009
Rick,

It may be specific to the bank you are working with. I work closing with the lender below on FHA loans. Feel free to give him a call. His customer service is excellent. He has been working with several of my buyers on FHA loans and they have been very happy.

Michael Burke
Bank of America/Countrywide Home Loans-Hoboken Branch
201-424-2717 Mobile

Please let me know if you have any additional questions. I can be reached at 201-694-8946.

All the best,

Walter J. Burns
Realtor-Associate
Weichert Realtors
1 Newark St.
Hoboken, NJ 07030
201-653-8488 Ext: 230
201-694-8946 Mobile
201-653-4154 Fax
wburns@weichert.com
0 votes Thank Flag Link Mon Feb 23, 2009
Sounds like it has to do with the bank you are working with because the guideline is 25% equity is needed in the property you are leaving if you are going to buy another primary residense. A 30% equity stake applies to conventional loans. Give a me a call I can get it done for you at a very competitive rate & cost.
0 votes Thank Flag Link Mon Feb 23, 2009
Lending answer:

Fannie Mae, Freddie Mac, and FHA insurance guarantees now all require substantial proven equity in a primary residence to be converted to a rental home if the prospective rent will be used towards qualifying income.

With Fannie and Freddie you must have 30% equity.

For FHA insured loans the loan-to-value ratio on the property to be converted to an investment residence must be at least 75% based on a current appraisal (no less than 6 months old) or by comparing the current mortgage balance to the original sales price.

FHA issued the rule last year with Mortgagee Letter 08-25. The new policy took effect with all FHA Case Numbers originated on or after September 19, 2008. All FHA lenders are required to abide by this rule; it is carved in stone.

This rule has been implemented nationally to stop the practice of some homeowners who are engaging in "turn and burn" fraud.

There is ONE EXCEPTION: Relocation - if you are being relocated by your current employer, going to work for a new employer, or moving to reduce your commuting distance, then you may use the rental income towards qualifying under FHA's Rental Income guidelines even if the property to be converted to an investment property does not have 30% equity. Bear in mind that the Relocation Exception is up to the underwriter to grant or deny since the lender is responsible to HUD if there is a problem with loan performance later on.

Question: Did this problem come up in underwriting, or during the interview with your loan originator?

FHA ML 08-25: http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/fi…
0 votes Thank Flag Link Mon Feb 23, 2009
Sounds like it has to do withthe bank you are working with because the guideline is 25% equity is needed in the property you are leaving if you are going to buy another primary home. 30 % applies to conventional loans
0 votes Thank Flag Link Mon Feb 23, 2009
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