Fannie Mae just made it easier for move-up-buyers to purchase a new home. Until recently, conventional financing required a move-up-buyer to have 30% equity in their departing residence if they wanted to use future rents to offset the mortgage, otherwise they had to qualify for 2 mortgages. As most people cannot afford to qualify for two mortgages, this rule prevented a lot of move-up-buyers from being able to purchase a new home. Fannie Mae just eliminated the 30% equity rule, so now a move-up-buyer with limited to no equity, can now use a lease agreement and future rents to offset the mortgage on their departing residence, so they can qualify for a new conventional mortgage. Check out how to qualify under this new rule!
New Rule From Fannie Mae opens up Purchase Market for Buyers
During the housing downturn, Fannie Mae introduced a rule to prevent people from buying and bailing on the home they owned.
To qualify for a new conventional mortgage, they required a move-up-buyer to have 30% equity in the home they were departing so they could use future rents to offset the mortgage, otherwise they had to qualify for both mortgages in their debt to income ratios. They put this rule in place to prevent people from just walking away from their departing residence.
This rule prevented many buyers from being able to move up, as the negative or limited equity position in their existing home prevented them from being able to use future rents to offset the mortgage. This meant buyers had to qualify for two mortgages in their debt to income ratios, and we all know that most people cannot afford to do that.
Fannie Mae has changed this rule and made it easier for homebuyers to purchase a new home and keep their existing residence. They no longer require a homebuyer to have 30% equity in their departing residence, if they want to retain the home and convert it to a rental and use future rents to offset the mortgage.
New Rule. Fannie Mae now just requires a Current Executed Lease Agreement for the property that will be converted to a rental.
The underwriter will review and use the rental income reflected on the lease agreement provided, and they will verify that the rental income reflected on the lease is deemed acceptable and in line with market rents.
This means a move-up-buyer with negative equity, or limited to no equity, can now use a lease agreement on their existing home and use future rents to offset the mortgage, so they can now qualify for a new mortgage.
This new rule will help more move-up-buyers get back into the market, as there are still plenty of homes with limited to no equity, but buyers were stuck in these homes due to this 30% equity rule.
I am sure you know several people who wanted to move up but were unable to, due to the limited or no equity position they had in their departing residence. A good idea would be to go through your database of clients and friends and see who may qualify under this new rule
Owning a Rental Property is a Great Investment
Owning a rental property is a great investment. With annual rents continuing to rise as much as 3% – 4% in many parts of California, coupled with low vacancy rates in most areas, many move-up-buyers want to convert their departing residence to a rental property.
As you can see below, just a 4% increase in annual rent, can increase a $1,500 monthly rent up to $1,974 in just 8 years, an increase of $474, which is a 32% increase in your investment.
This new ruling by Fannie Mae is also going to allow a lot of people to convert their existing property to a rental property, so they can take advantage of the investment opportunity.
It is good news that logic is finally prevailing and that Fannie Mae is starting to ease up in their mortgage qualifying rules, as this 30% rule was preventing a lot of move-up-buyers from being able to purchase a new home.
The Impact of Rates on Buyer Purchasing Power
With this recent rule change by Fannie Mae, it’s a good time for buyers and move-up buyers to get into the market.
Changing mortgage rates do more to influence home affordability than changing home prices. This chart below shows the “impact of rates on buyer purchasing power or affordability“.
When rates increase by just .5%, a buyer loses 5% in purchasing power or affordability. Or vice versa, when rates decrease by .5%, a buyer gains 5% in purchasing power.
For example, see how the payment at the 3.75% rate on a $400k loan, is roughly the same payment as the 4.25% loan at $380k, a gain of 5% in purchasing power for a buyer. A 5% increase in purchasing power can make the difference for a buyer being able to afford a certain price range in their housing market.
If you have any questions about this new conventional rule or getting approved for financing, please feel free to contact me directly at 858-442-2686.