I have many potential home buyers looking to convert their current home into a rental property so they can buy a new home. The first thing a lender will ask is “why are your looking to do this?” Typically, there are 2 reasons:
- Not enough equity in your current home to sell
- Looking to grow future wealth
Underwriting guidelines have changed over the past few years for this type of transaction. When the economy went thru a downturn in 2008, many homeowners were telling banks that they were converting their home into a rental and as long as they showed the underwriter a lease, the mortgage obligation would be offset by rental income which would allow them to buy a new home.
As soon as this home buyer was in their new home the rental property would become delinquent and finally foreclose on. This was happening throughout the country, rapidly. The reason this was happening was due to declining values and homeowners could not sell without taking a loss. This forced the mortgage industry to change guidelines.
At that point there were two categories a buyer could fall into. One category was a buyer who had less than 30% equity and one that had more than 30% equity. The two categories had different requirements for the borrowers.
Other mortgage guideline policies are now in place that adequately address credit history, rental income, and assets. This has allowed Fannie Mae to change their requirements associated with converting a principal residence to a second rental.
There are no longer two categories of buyers. Now all buyers utilizing a Fannie Mae loan. who would like to convert their current home into a rental property are subject to the following guidelines:
- Have a signed, one year minimum, lease agreement with a tenant
- There has to be proof of the security deposit in your account
The rule still stands that 75% of the rental income will be used to offset the monthly payment. When current lease agreements are used, the lender must calculate the rental income by multiplying the gross rent(s) by 75%. The remaining 25% of the gross rent will be absorbed by vacancy losses and ongoing maintenance expenses.
If you have questions about converting your current home into a rental, my team and I be happy to help!