More Fannie Changes for Investment Properties and Second Homes

Thursday, July 31, 2008
By Rhonda Porter

Effective tomorrow (August 1, 2008) borrowers who convert their existing residence to an investment property or second home will be treated to tougher standards if they’re using a Fannie Mae loan.    Here are the new requirements:

Converting existing residence to a “second home”.

  • Borrower must qualify for both payments (this is not new).
  • Unless the borrower has at least 30% equity in the existing property, they will need 6 months PITI for both properties in reserves. 

Converting existing residence to “investment property”

  • The borrower may only use rental income (75% credit) of their existing property if they have at least 30% equity in the property.   Otherwise, they must qualify with both full payments (no credit for rent).
  • Rental income must be documented with a fully executed lease agreement and a receipt showing the security deposit from the tenant has been deposited into the borrowers account.
  • If the borrower does not have 30% equity in the proposed investment property (former residence) then they will need 6 months PITI for reserves for both properties.

Either an appraisal, AVM or Broker Price Opinion is used to determine if there is 30% equity in the existing home that is being converted to a second home or investment property (this may be determined by underwriting).  

Last, be careful when reading guideline changes, such as this.  Underwriting guidelines and loan programs are changing constantly, post like this are quickly “dated material” and no longer applicable–do verify information you find on the internet with your Mortgage Professional to make sure the information is still valid.

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This entry was posted on Thursday, July 31st, 2008 at 6:46 pm and is filed under Buyer Information, Fannie Mae & Freddie Mac, Mortgage/Lending. You can follow any responses to this entry through the RSS 2.0 feed.

About the Author: Rhonda Porter

Rhonda Porter began her mortgage career on April 1, 2000 at Mortgage Master Service Corporation, a family owned correspondent lender that has been lending in the Pacific Northwest for over 30 years. Prior to mortgage, she was in title industry for 14 years where she managed an escrow branch and gained an invaluable insight to the real estate industry. Rhonda Porter has a CMPS designation and is a Licensed Loan Originator 510-LO-32047. Rhonda is also the Chairperson for the Social Media Committee for WAMP (Washington Association of Mortgage Professionals). Rhonda originates residential mortgages for homes located in Washington State. You can reach Rhonda at rhonda@mortgageporter.com or by calling (206) 718-9488.

6 Responses to “More Fannie Changes for Investment Properties and Second Homes”

  1. biliruben
    July 31, 2008 at 9:32 pm

    Rhonda -

    Do you have a good handle on the changes to the tax implications for non-owner-occupant property?

    Reply
    #322742
  2. Rhonda Porter
    July 31, 2008 at 10:23 pm

    biliruben, I’m trying to keep up with the constant mortgage changes so I would feel better having a CPA respond (my long way of saying “no”).

    Reply
    #322746
  3. Rhonda Porter
    August 1, 2008 at 9:52 am

    biliruben, I just came across this:

    Owners of vacation homes or investment property are about to lose that juicy capital-gains exclusion when they sell the second home. For the last eight or nine years there has been a game where owners moved from principal residence to investment or recreation property to new personal residence to satisfy the requirements to qualify for the $250,000 ($500,000 for couples) exclusion of sale profits. Under the new law taxes will be levied on sale proceeds of second homes based on the number of days the house was not a qualified personal residence. Any gain resulting from appreciation on the property after May 6, 1997 will be taxed as ordinary income.

    From this article (which also has good information on the “tax credit”.

    Reply
    #322782
  4. biliruben
    August 1, 2008 at 11:09 am

    Thanks, Rhonda.

    Reply
    #322805
  5. Anon
    June 23, 2009 at 2:19 pm

    On converting an existing residence to investment property, my understanding is that if it is rented out for 6+ months, then the 30% equity requirement not longer applies (but the 75% rent credit does) when applying for a loan to purchase a new principal residence.

    Reply
    #340925

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