When a homeowner buys a new home, he has 3 options of what to do with his current residence:
- Sell the home, paying off the mortgage in full
- Keep the home as a second/vacation home
- Convert the home to an investment property
The most common action plan is the first one -- sell the home and pay off the mortgage. However, with home prices poised to rebound, some savvy homeowners are trying to avoid "selling low".
Unfortunately -- as of August 1, 2008 -- waiting out the market won't be so easy.
Burned by foreclosures and wary of risk, Fannie Mae issued new conforming mortgage guidelines that specifically apply to home buyers planning to convert an existing primary residence into a second home or investment property.
Among the highlights of Fannie Mae's Changes:
Selling the primary residence
If the new home being purchased closes prior to the existing home's sale, both payments must be used to qualify the buyer for the new mortgage.
Converting to a second home
If the home has less than 30 percent equity in it, the home buyer must show 6 months of PITI reserves for both properties to qualify for the new mortgage.
Converting to an investment property
If the home has less than 30 percent equity, its rental income may not be used to help the buyer qualify for the new mortgage.
If it seems like mortgage rules are getting strict, that's because they are. And they're expected to get tougher, too. With each foreclosure and high-profile bank collapse, mortgage lenders tighten up their guidelines just a bit, freezing out the "fringe" borrower from access to mortgage money.
Mortgage rates may rise through 2009, or they may fall. We don't know. But what we do know is that borrowing money to buy a home will be tougher.
If you plan to buy a home in the next 12 months, consider moving up your timeframe or -- at least -- planning ahead. Guidelines for jumbo mortgage programs are likely to follow as Fannie/Freddie set the tone for the overall market. Understanding the mortgage rules and how they can change may be the difference between getting approved for a home loan, or getting turned down.