If you are buying your next home, you may be considering converting your existing home into a rental or second home. The lender on your new home will have different requirements depending on what type of financing you’re obtaining.
A few years ago, significant reserves and equity in the departure home was required for conventional programs causing some buyers to opt for FHA. Guidelines for these programs have changed making conventional easier to qualify for than FHA when converting an existing home to become a rental property (or second home).
Here are some of the guidelines based on which mortgage program is being used for the financing of the new home.
Conventional – Fannie Mae
- Borrower must qualify for both mortgage payments
- Reserves required depend on how many mortgaged properties are owned by the borrower.
- Rental income may be used if there is a signed lease.
Conventional – Freddie Mac
- Borrower must qualify for both mortgage payments
- Reserves required based on Freddie Mac automated underwriting findings.
- Rental income can be used if there is a signed lease.
FHA
- Income from departure property may be used if borrower relocating due to employment more than 100 miles away from current primary residence.
- Borrower’s departure home must have at least 25% in home equity.
VA
- Borrower must qualify for both mortgage payments
- Rental income on the departure property may only be used to offset the mortgage payment of the departure property. (Rental income cannot be treated as “positive” income).
- Departure property mortgage cannot be a VA mortgage loan.
- 3 months mortgage payments (PITI) required for reserves.
- If borrower has a 2 year history of owning investment properties, full rental income may be used.
USDA
- USDA only allows home buyers to own one property so this program would not be an option.
If you are considering buying a home anywhere in Washington state, I am happy to help you with your mortgage needs!
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