Commentary by Jason Kotar
RISMEDIA, August 25, 2008-Effective August 1, 2008, Fannie Mae issued some new rules affecting the conversion of a principal residence to a second home or investment property.
For a second home, both mortgages will be used to qualify for the new transaction (as occurs today.) The difference is that the borrower must prove 30% equity in the existing property or be required to escrow 6 months of principal, interest, taxes and insurance (PITI) for BOTH properties. With 30% equity, the lender may allow 2 months escrow on both properties.
On investment properties, Fannie now will require 30% equity on the existing property for the investor to claim up to 75% of the rental income as an offset to the mortgage payment in qualifying for a loan. Without the 30% equity, the rental income cannot be used as an offset AND the current and proposed mortgage payments must be used to qualify for the new loan. In addition, 6 months PITI for both properties must be escrowed.
With declining home values in most markets, these changes will make many homeowners ineligible for mortgage loans, when they want to retain ownership of the existing property.
Finally, as additional restrictions / requirements are placed on borrowers by Fannie, Freddie or the mortgage insurance companies, it becomes incumbent on real estate professionals to ask the pertinent questions of their client at the beginning of your relationship. Pre-approving your client is more critical than ever.
Jason Kotar is president of Kotar & Associates.
For more information, call (954) 734-3504, e-mail JKotar@DiversityLG.com.
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