Received a note from one of my lenders the other night detailing changes in how FHA is handling those folks who are planning to rent what currently is their primary residence with the intent of moving into another home:
“Due to FHA’s concern that some homebuyers … may attempt to provide misleading information regarding the rental income of the property being vacated to qualify for the new mortgage, FHA is instituting underwriting guidance designed to assure that the homebuyer can make payments on the full debt service of both mortgages.
Consequently, beginning with case number assignments on or after the date of this letter [September 19] and until further notice, the underwriting analysis may not consider any rental income from the property being vacated except under circumstances described in this Mortgagee Letter.”
What are the exceptions?
- Relocation – the homebuyer is relocating with a new employer or being transferred by the current employer to an area not within reasonable and locally recognized commuting distance.
- Sufficient equity- The homebuyer has a loan-to-value ratio of 75 percent or less as determined by either a current residential appraisal or by comparing the unpaid principal balance to the original balance.
On the relocation exception, the lease for the original property needs to be at least one year in length.
What does this mean in the Phoenix real estate market? In short, a lot of people who had been considering renting their house and moving into a larger home based on the current lower prices aren’t going to be able to do so if they’re upside-down on the first half. Even covering the mortgage with the rent (not always a slam dunk) isn’t sufficient.
The reasoning is simple – FHA is afraid the buyer eventually will stop paying on the first home after purchasing the second, which FHA calls a “buy and bail.”
“The exclusion of rental income from property being vacated is being instituted on a temporary basis while FHA further analyzes this situation to determine whether permanent measures may need to be taken. This will assure that a homeowner either has sufficient income to make both mortgage payments without any rental income or has anequity position not likely to result in defaulting on the mortgage on the property being vacated.”
Given how often I’ve heard this scenario floated over the past several months, reaction from FHA only was a matter of time. And unlike the fiasco that eliminated down payment assistance, this appears to be a good move.
Speaking of moves by FHA, it also appears the 3.5% down payment requirement (up from the current 3% for FHA financing) will not kick in until the first of the year.[tags]Phoenix real estate[/tags]