How to Buy an Investment Property with a 10 Percent Down Payment with no PMI: Fannie Mae Homepath Mortgage

HomepathEDITORS NOTE: Fannie Mae is no longer offering the FannieMae HomePath mortgage program. If you are considering buying a Fannie Mae HomePath property (foreclosure that is owned by Fannie Mae) in Washington state, I’m happy to help you.

Seattle area investors are taking advantage of current lower home prices and are buying rental properties.  One of the issues with investment property is that it often requires a larger down payment and more stringent underwriting guidelines.  However, if you buy a qualified property that is owned by Fannie Mae, the Homepath guidelines will allow as little as 10% down for an investment property with NO private mortgage insurance and NO appraisal.

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Determining Net Rental Income when Qualifying for a Mortgage

EDITORS NOTE – 11/22/2014: Oh the joys of writing a mortgage blog… guidelines change constantly. Information in this post is not current.  Please check out this more recent article on rental income for conforming mortgages here. And if I can help you with your investment (or any) property) in Washington state, please contact me!

Rental income is generally not fully credited when qualifying for a mortgage.  Lenders will “discount” the rent because of the cost and risk associated with owning investment property.  If someone does not have at least two years history as a landlord, they may not be able to use the rental income at all and may have to qualify with the full mortgage payment.

Conventional financing allows a qualified investor to receive credit for 75% of the gross rental income.  From this figure, property taxes, insurance, home owners association dues and any mortgage payments are deducted to create the amount of rent (positive or negative) that the lender will use for qualifying purposes.

For example, a property has a $2,000 total mortgage payment (PITI) with no HOA dues and receives rental income of $2,000 per month.

$2,000 rental income x 0.75% = $1,500.  $1,500 less the mortgage payment of $2,000 creates a net rental income of negative $500 per month.   This would be factored as a debt and not a credit or “breaking even” on the loan application for qualifying.

Of course if there are multiple investors involved, the net rental income is split accordingly.

FHA does not have the same two year history requirement for existing rentals as conventional loans do.  The vacancy factor in the Seattle area is 15% which means that 85% of the rent is allowed to be factored as income.  FHA loans may use future rental income (no 2 year history) when converting an existing home into a rental if the borrower is being relocated or if there is enough equity in the subject property.

To document rental income, be prepared to provide tax returns and signed lease agreements. Lenders will use the net income from your tax returns.

When you have rental properties, be prepared to have additional reserves (savings) required based on how many properties are owned.

If you have questions about qualifying for a mortgage for a home located in Washington State, please contact me.  If you would like a personal rate quote from me for an home located in Washington state, click here.

Buying a Home with Owner Occupied Financing After Refinancing Your Home as Owner Occupied

I’m seeing a trend where home owners are refinancing their current home as “owner occupied” and then weeks after closing, try buying another home as “owner occupied”.  You cannot have two owner occupied homes.   It’s really that simple. 

I’ve had a couple of surprised people contact me who thought they could buy a home just following a refinance only to learn by their mortgage originator that they have to finance the new home as an investment property.   Financing an investment property not only offers a slightly higher interest rate than a mortgage for a primary residence, it also has tougher guidelines with higher down payment requirements and greater reserves (savings).  

If you are considering refinancing your primary residence and possibly buying another home, you should discuss this with your mortgage originator as soon as possible.  You will be signing a deed of trust which has language that you intend to occupy that home for 12 months.  Some folks might feel that the “intending to occupy” means that they can refinance as owner occupied and a couple months later buy “owner occupied” and odds are, they will be caught.  It may be purely unintended for this to happen, but be prepared for the possibility the new purchase to be treated as an investment property, even if you’re going to live there. 

If you’re considering taking advantage of the lower home prices and lower rates, you may want to delay your refinance of your current “primary residence” or talk to your mortgage originator about refinancing your current home as an investment property.  Your next purchase might qualify as a second home, however the property typically needs to be about 50 miles away from your primary residence (the one you just refinanced) and it is the underwriter’s call on whether or not the second home “makes sense”…this can be a real grey area.  

Life happens and we know plans change. Be upfront with your mortgage professional if you’re thinking about buying a home.  You may want to ask them to verify with your personal scenario with an underwriter.  Finding yourself in the middle of a transaction to buy your next home and having it declined as owner occupied can be an expensive experience.

Related post:

Is it a Primary Residence, Second Home or Investment Property

Can I Convert My Existing Home to an Investment Property to Buy My Next Home?

Fannie Mae’s HomePath Program

EDITORS NOTE: Fannie Mae is no longer offering the FannieMae HomePath mortgage program. If you are considering buying a Fannie Mae HomePath property (foreclosure that is owned by Fannie Mae) in Washington state, I’m happy to help you.

Fannie Mae’s HomePath program is available to purchase qualified foreclosed homes (owned by Fannie Mae) with expanded conventional guidelines, competitive mortgage rates and often times, with special incentives.

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Can I Convert My Existing Home to an Investment Property to Buy My Next Home?

EDITORS NOTE: These guidelines have changed. If you’re buying a home in Washington state, please contact me for current guidelines.

This is a common question I’m asked these days…mostly because many home owners don’t have as much equity as they would need in order to sell their current residence.  With home prices being at their lowest in years, many want to take advantage and buy their next home and simply rent out their current residence.

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Is it a Primary Residence, a Second Home or Investment Property?

Every so often, someone will be interested in financing for a home they will not be living in 100% of the time…they want the best rate which is “owner occupied”.   It’s crucial to know the difference in your lenders eyes and to be completely upfront so you avoid committing fraud.  Bottom line, the property and situation needs to make sense to the underwriter.   Here are some basic definitions:

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