Converting Primary Residence to Second Home or Investment Property - Fannie Says Not So Fast...
Well, as if we didn't have enough changes taking place at lightening speed, now one more change from Fannie Mae came down effective August 1, 2008. This time the issue swirls around new rules that will affect converting your principal residence to a second home or investment property.
Going forward, if you plan to turn your primary residence into a second home, both mortgages will be used to qualify. While this is nothing new, what is new is that they are requiring the borrower to prove that they have 30% EQUITY in the residence or they will be required to escrow 6 months of principal, interest, taxes and insurance for both properties. Wow...that's for BOTH properties and that can be a large chunk of change. 
Your lender may allow two months of escrow on both properties if you do have at least 30% equity in the property.
Now...what if you want to turn that primary residence into an investment property, Well, the same rule applies and Fannie will now require 30% EQUITY on the existing property if the investor wants to claim up to 75% of the rental income as an offset to the mortgage payment in order to qualify for the loan. And what if you don't have the 30% equity, then the rental income CANNOT be used as an offset and the both mortgage payments (your current one and the new one) must be used to qualify for the new loan. Ouch!!! Additionally, 6 months PITI for both properties must be escrowed. 
We know that the Phoenix metropolitan area still has a lot of pockets that are considered to be in a declining market, so these new changes are going to make many homeowners ineligible for mortgage loans, if they want to retain ownership of the existing property.
As we've said in other posts, lending was only expected to get more difficult as fall came upon us and we continue to see that happening.
As always, thanks for "hanging out" with us.