Wednesday, August 6, 2008

Huge Impact on 2nd homes and Investment Properties

New conforming mortgage guidelines threaten owners of second homes and investment propertiesConforming mortgage guidelines are the Home Loan Rule Book, delineating between applicants that approved for a mortgage and those that do not.

Effective today, the rule book just got a little bit tougher.

According to Fannie Mae, homeowners converting their primary residence into a second home or investment property will be subject to additional underwriting scrutiny. Fannie Mae is leery of lending to people that may be over-extended.

The complete underwriting update is available at the Fannie Mae Web site but some of the more important points are summarized below, divided into Second Home and Investment Property.

Second Home Guideline Changes

  • Without 30 percent equity in the second home, mortgage applicants must have 6 months worth of PITI reserves for both properties in their bank accounts.

  • With 30 percent equity, the PITI reserve can be reduced to 2 months.

Previously, there was no minimum reserve requirement.

Investment Property Guideline Changes

  • With 30 percent equity in an investment property, 75% of the monthly rental income can be applied toward the applicant's monthly household income.

  • Without 30 percent equity, rental income may not be applied to the applicant's monthly household income and 6 months PITI is required for both properties.

Previously, 75% of the rental income was allowable regardless of equity, and minimum reserve requirements were 2 months.

Even though just a small percentage of Americans own second homes or investment properties, the conforming mortgage guideline changes impacts homeowners everywhere.

Changing mortgage guidelines impact the supply and demand curve for housingThis is because more restrictive guidlines lead to two separate, but concurrent, outcomes:

  1. The demand for homes reduces because fewer buyers qualify for mortgages

  2. The supply of homes increases because fewer sellers can refinance into more affordable home loan

Less demand and more supply places downward pressure on home prices.

Now, remember that mortgage guidelines continuously evolve and what's accurate as August 1, 2008, may not be accurate six months down the road. In other words, confirm what you're reading about mortgages online with your loan officer before making any real estate-related decisions.


ocrenter said...

how are they defining 30% equity? 30% down on the original value or current value?

the difference would be huge.

Mr. Mortgage said...

It is based on current appraised value.

ocrenter said...

this is huge because of a couple of things it'll stop.

1. a person underwater can no longer jump ships by purchasing a lower priced REO and let the first home foreclose.

2. if someone bought over the last 5 years, they are effectively completely removed out of the pool of buyers.

3. vacation home/2nd home/investment home market is going to be hit hard.

the more government actions, the more the burst gets worse.