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Katina Wright, Real Estate Pro in Atlanta, GA

Mortgage Qualification & Rental Income..

Asked by Katina Wright, Atlanta, GA Sat Jul 24, 2010

I have a buyer who is relocating and has been told by one bank that in order for the rental income generated from renting her current home a 25% Equity position in that home is required in order for her rent monies to be counted as income.

I have not come across this before now and want to know if there are any exceptions to this 25% (unrealistic) equity position rule?

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Answers

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I have an investor purchase closing this week. It is the Fannie Mae Homepath program at 90% LTV. This is my customer's first investment property, so we had to count the full amount of the proposed payment against him. He was able to qualify for both that payment and the payment on his principal residence.

The maximum no. of financed properties that most lenders are allowing is 4, including the primary residence, just so you are aware of that rule. I am not aware of any guidelines that allow up to 10 financed properties as in the past.

As to your other question, about equity in the present home, there is no requirement for equity in the present home if the borrower is simply purchasing a rental property. There may be cash reserve requirements as determined by each particular lender's guidelines.

Hope that helps...

Sam Thompson
Homeservices Lending an affiliate of Wells Fargo Home Mortgage
770-301-0527
0 votes Thank Flag Link Mon Jul 26, 2010
You have asked two different questions. If you are not counting the rental income in qualifying, the equity is not significant. Reserves are required. Investors are buying with mortgages ever day. Fannie, Freddie, FHA and our investor require reserves based on credit score, type of loan and credit score.

Pre qualifying a potentian borrwer with an experienced loan officer in the beginning of the home search is essential to this process for it to go well.

Sally W. Hamby
Fidelity Bank Mortgage
404 644 7696
0 votes Thank Flag Link Mon Jul 26, 2010
This is REDICULOUSLY HELPFUL!! Talk about coloring inside the lines :-)

OK....So what are rules these days for investors who are NOT giving up their primary residence but acquiring units to rent? A while ago I was of the understanding that there is a limit to the number of mortgages an individual could hold.

Are they also required to have an equity position in their primary residence? It's not like everybody isn't paying cash these days, but what are the rules?
0 votes Thank Flag Link Mon Jul 26, 2010
Betty, what you have pointed out about the loan officer not knowing is an unfortunate problem that still occurs, loan officers not keeping up with changing guidelines, or not knowing guidelines to begin with. It used to be that there were loan officers that took every loan in figuring that they would throw it up against a wall and see what sticks. That is not going on as much, but the issue with turning a primary residence into a rental property is one that many loan officers are not familiar with. They learn about it when it happens to them. Also, there are some portfolio lenders who do not allow rental income to be used unless it has been received for at least 2 years.
0 votes Thank Flag Link Mon Jul 26, 2010
Katrina,

When a loan goes into default, someone personally speaks to the defaulting borrower. It was found the borrower of a property left behind would let that property go if they had financial problems when they had little equity.

Now... we do have to live with the ruling on rental income and equity in the property being left behind. Without the equity in the property, you buyer will not be able to count the rent monies.

Sally W. Hamby
Fidelity Bank Mortgage
404 644 7696
0 votes Thank Flag Link Mon Jul 26, 2010
This was helpful to me, because I just came across this last week on a deal that went south. Had I been aware, I would advised my client and she could have closed two months ago before she retired. After retirement her income would not cover both properties. What I don't understand is why the loan officer didn't advise her upfront
0 votes Thank Flag Link Mon Jul 26, 2010
WOW.... :-(

THANK YOU Jeff and Sam for the new knowledge. It's one thing to respect that money is harder to come by another to have a first hand experience of the policies that clinch the stagnation!

This buyer will be deeply heart broken. Vast difference from the 1% rule of yester year. I guess the lenders are all saying "CHECK & MATE".

I appreciate your taking the time to respond!!
0 votes Thank Flag Link Sat Jul 24, 2010
Katina...this is known as the departure residence rule that came into effect less than a year ago....So, in essence, the buyer has to qualify for both payments, which makes it a lot more difficult. This is true for both conventional and FHA loans now. In fact, conventional requires 30 per cent equity in the present home. In addition, there are cash reserve requirements of 6 months PITI for both properties if the equity is less than that amount. Yes, it is more difficult to qualify these days!
0 votes Thank Flag Link Sat Jul 24, 2010
Hello Katrina, the bank is right - unfortunately. That is the requirement for an fha loan. Conventional Loans will require 30% equity in the home being rented.
0 votes Thank Flag Link Sat Jul 24, 2010
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