Monday, March 23, 2009

Investment Properties Affecting New Mortgages

Some homeowners who are looking to refinance their primary residences may find they have some difficulty qualifying for a new loan, even though little has changed in their situation of income and credit over the last year.

They may be hindered by investment property they hold.

Specifically, revised Fannie Mae guidelines apply to borrowers who instead of selling a former home to buy a new primary residence turned it into a rental property.

Fannie Mae now requires that you have at least 30% equity in that former primary residence before you can count the rental income.   This can be a hefty hurdle in today’s soft real estate market.

An investment property could’ve easily declined in value over the last three years. 

Furthermore, to show that the 30% equity value exists, borrowers will need to get an appraisal of that former property, as well as a rental analysis performed by a licensed appraiser.

As it is and was, underwriting guidelines only allow borrowers to count 75% of their rental income on investment properties.  The other 25% is ignored, chalked up to property maintenance costs and possible tenant lapses. 

But that 75% is golden when it comes to getting a new loan, even on the primary residence.  Many borrowers need to count those rent checks in their overall income.  Otherwise, their debt to income ratio (DTI) is too high to qualify for a new loan.

In this situation, the borrower may not be in any financial trouble.  They may be bringing in enough money from their salary and rental income to handle all their obligations.  But the underwriter can’t see it this way. 

She looks at the two mortgages and other debt.  And she can’t balance this with any of the borrower’s rental income.    She can’t approve the loan because the borrower, on paper, doesn’t make enough money.

Thus some borrowers trying to refinance their present home can’t qualify.

Again, this specific requirement only occurs on rental properties the borrower once resided in.  It does not apply to houses that were bought and never lived in by the owner.

1 comment:

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