Fannie Mae and Freddie Mac and the FHA have caught on to this practice. They set new guidelines effective August 1, 2008.
Borrowers who currently own their home typically have three options when they decide to purchase a new principal residence. They can
â€¢ sell the current residence and pay off the outstanding mortgage,
â€¢ convert the property to a second home, assuming they can qualify with both the existing and new mortgage payments, or
â€¢ 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.
In order to ensure that borrowers have sufficient equity and/or reserves to support both the existing financing and the new mortgage being originated, Fannie Mae is updating the policies for qualifying borrowers purchasing a new principal residence and converting their existing principal residence to a second home or investment property.
Both the current and the proposed mortgage payments must be used to qualify the borrower for the new transaction.
6 months of PITI for both properties is required to be in reserves. Lender may consider reduced reserves of no less than 2 months for both properties if there is documented equity of at least 30 percent in the existing property (derived from an appraisal, automated valuation model (AVM), or Broker Price Opinion (BPO), minus outstanding liens)
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, AVM, or BPO, minus outstanding liens).
The rental income must be documented with: a copy of the fully executed lease agreement; and the receipt of a security deposit from the tenant and deposit into the borrowerâ€™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 6 months of PITI for both properties is required to be in reserves.
FHA guideline requires
3 months PITI, Excellent Credit, Letter of Explanation regarding the decision to rent out property. "Not going to walk away." Form 1007 rental comps or current market rents from appraiser. Lease agreement. Copy of cancel check for security deposit and proof that it was deposited by property owner.
The new home must be worth more then your previous residence. If you can meet the Fannie Mae, or FHA guidelines you can buy the new home. If you short sell, or give the house back to the bank, you will not be able to qualify for a loan through Fannie Mae, or Freddie Mac for four years.
See a Real Estate Lawyer about your options as far as giving the house back to the bank. You have three options.
Welcome Home Real Estate & FInance