Lenders have continued to require stricter guidelines to obtain a mortgage. Gone are stated income products. Most lenders require income to be fully documented via pay stubs for employees or tax returns for self- employed applicants. Fico score requirements have increased. Now lenders have changed the guidelines for converting your primary residence into an investment property.
In a soft real estate market, many buyers seeking to purchase a new home were not able to sell their existing home. Many owners did not have enough equity to cover closing costs or commissions, so they opted to lease their home and sell in the future when home prices appreciated. In the past, the homeowners simply provided a signed lease for their home, and the lender would count 75% of the rental income towards total debt ratios of new mortgage and home.
Lenders have changed the rules for converting your primary residence into a rental/investment property. In order to count the rental income of the converted property, the borrower must have documented equity of at least 30% (appraisal value minus outstanding liens) in the existing home based on a full appraisal. The rental income must be documented with a fully executed lease and receipt of the security deposit from tenant and deposit into borrower’s account. Rental income cannot be used if 30% equity cannot be documented or if the LTV on the proposed mortgage is greater than 80%. Borrower must also have 6 months of PITI reserves for both properties.
If borrowers do not meet the qualifications, they will have to fully qualify for both mortgages and won’t be able to count rental income. Lenders just recently lowered the total debt ratio to 45% for conventional mortgages. For example, if a borrower(s) has gross income of $10,000 per month, the total monthly debt payments including mortgage (PITI) for current home, mortgage for new purchase, car payments, student loans, and minimum credit card payments may not exceed $4,500 per month (45% times gross monthly income). This will make it extremely challenging for many borrowers to qualify in purchasing a second home. Many home owners will be forced to sell their home first, because they won’t be able to cover the debt ratios for their current debt and two mortgages.