Are you planning on buying a new home and retaining your old residence as a second home or investment property? If so, Fannie Mae’s new lending guidelines** may complicate or entirely derail your plans.
Borrowers who currently own their home typically have three options when they decide to purchase a new principal residence. They can:
- sell the current residence and pay off the outstanding mortgage
- convert the property to a second home, assuming they can qualify with both the existing and new mortgage payments
- convert the property to an investment property, 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.
In both cases (second home or investment property), reserve requirements are rising to 6 months of principal, interest, taxes and insurance for both properties. In the investment property scenario, 75% of rental income may be permitted to offset the mortgage payment only if you can document that you have at least 30% equity in the property.
To read the complete section on Conversion of Principal Residence to a Second Home or Investment Property, see pages 5 and 6 of Fannie Mae Announcement 08-16.
The mortgage guidelines are constantly changing, so please consult with your lender well before you decide to purchase a home. Please contact Michael Zimmerman if you need a referral to a competent mortgage lender.
**Fannie Mae Announcement 08-16 dated June 25, 2008 becomes effective August 1, 2008
