Breaking News!
Fannie and Freddie are changing the rules on how payments on existing primary homes are treated when a buyer is purchasing a new home and plans to rent out the old house. In the past, we have been able to offset the payment on their existing home by showing a lease for the house and counting the rental income to cover the house payment.
Under the new rules, this will only be possible if there is a minimum of 30% equity in the existing home. So, if the house had a $200,000 mortgage on it, then it would have to be valued at over $285,000 to be acceptable as a rental conversion. Otherwise, the buyer has to be able to qualify with both house payments and has to have 6 months of house payments in reserve after closing. Ouch . . .
This change in guidelines appears to me to be directly related to a new phenomenon; people buying a new house and then letting their old home go into foreclosure after closing on the new house. I have been reading about this on the web. The idea is if you owe more than your home is worth then you go out and buy a new home at a great price. You indicate that you are going to be renting the old house out. After closing on the new house you stop making the payments on the old house which has negative equity and it goes into foreclosure. Sure your credit is wrecked but you already bought a new house and your bank loses all of the money on the old house. Some great scam eh?
I don’t know who comes up with these ideas but it is bad for everyone. Forces home values down further and adds to the steep losses which are seriously undermining the banking industry in the U.S. Whatever happened to the idea of living up to your obligations?
The bottom line is that the effort to close up loop holes like this is making it harder for legitimate buyers to keep their existing homes, rent them out and buy a new house. Stay tuned. The currents are changing on a daily basis and I’m just trying to keep you informed.
Written by Ken Mascia
Oxford Financial, 248.644.1200
Visit Website
Search for homes in Oakland County
{ 6 comments… read them below or add one }
Jim Johnson CRS 07.05.08 at 4:56 pm
Great Blog! I have been selling real estate in Bend Oregon since 1981 and find it refreshing to find a helpful blog like yours! Keep up the good work!
http://www.bendoregonrealestateexpert.com/
Tyler, The Wealth Creation Guy 07.05.08 at 11:46 pm
Maureen - Keep Ken around. This was a great post. Many folks aren’t aware of all of the recent guideline changes (especially on investment properties)!
Keep educating Ken. Being a student of the business is more important now than ever!
Tyler, The Wealth Creation Guy 07.05.08 at 11:49 pm
Maureen - Good work having Ken write on this subject. It’s been an extremely timely topic with all of the recent guideline changes. Non owner occupied properties have sort of gotten lost in the mix.
Ken - It’s good to see a student of the business educating others! Keep up the great work.
Ken Mascia 07.07.08 at 9:50 am
Thanks you guys! It’s nice to know someone is reading the stuff I write and getting something out of it.
Rus 07.14.08 at 1:17 am
If you qualify for a new home purchase when the current residence is upside-down, then that gives the owner a strong incentive to let the (current residence) / (would-be rental property) slip into foreclosure after getting favorable loan terms on his new cheaper residence.
Your credit rating takes a major punishment, but you have already secured a good terms on your new mortgage (which is cheaper than the old).
Sites like “youwalkaway” or “letitsink” explain this game very well.
- Let It Sink - If You’re Upside-Down In Your House, Just Walk Away!
FAnnie is trying to make sure this can’t happen again by adjusting its guidelines. If this continues to happen on a large scale they have BIG problems.
Rus 07.14.08 at 1:30 am
whoops look at that. Fannie / Freddie already have big problems. A treasury / fed rescue of Fannie is afoot.
……..
Americans have $6.8 trillion deposited in institutions.
$4.2 trillion is FDIC insured
And the FDIC only has $52 billion tucked away to back the entire system.
One more time, the FDIC only has 1% put away to back the entire thing. And Americans stupidly have $2.6 trillion sitting out there at naked risk.
(side note - just think how dumb you had to be to have more than the FDIC limits sitting in IndyMac. Amazing)
FLASH: THE UNITED STATES TAXPAYER HAS JUST BAILED OUT THE KINGS OF THE GREAT HOUSING PONZI SCHEME - FANNIE MAE AND FREDDIE MAC
http://www.marketwatch.com/news/story/treasury-fed-move-rescue-fannie/story.aspx?guid={AF7D0E9C-115C-4B41-9AF6-97BD668BC455}
GEtting home l;oans approved ain’t gonna get any easier.