Converting home to rental?
Question: Allison,a friend of mine, whose two daughters are grown and gone, would like to remodel a home in the neighborhood, sell his present residence, and then move in to the remodel. Given the present conditions, he doesn't feel he can do either. He's uncomfortable with investing a ton of dollars on the remodel that he may otherwise need for day-to-day expenses, and he's afraid there's already too much inventory now on the market to list his home for sale "The remodel may be closer," he said. "There are a lot of people out there now willing to work for a lot less than they were two years ago. If the drop in labor costs reaches a point that it equals what some of my investments have lost, it's close to a wash. I might as well do it.” How would you suggest he proceed?
Answer: Good question. Borrowers who currently own their home typically have three options when they decide to purchase a new principal residence. They can sell the current residence and pay off the outstanding mortgage, make the property into a second home, or convert the property to an investment property. In the past two years, more and more people have been unable to sell and have been forced to consider the two other options.
Lenders do have some leeway in the case of a second-home conversion. Lenders may consider reducing reserves of no fewer than two months for both properties if there is documented equity of at least 30 percent in the existing property. The value can be derived from an appraisal, automated valuation model (AVM), or broker price opinion (BPO), minus outstanding liens. The previous guidelines did not include a required equity percentage.
If the owner wishes to convert the primary residence to a second home, the current and the proposed mortgage payments must be used to qualify the borrower for the new transaction.
If the current residence is converted to an investment property, Fannie Mae will continue to permit up to 75 percent of the rental income to be used to offset the mortgage payment. Again, the new twist is the needed documented equity of at least 30 percent in the existing property. The rental income must be documented with a copy of the fully executed lease agreement, and the receipt of a security deposit from the tenant and deposit into the borrower's account. If the 30 percent equity in the property cannot be documented, rental income may not be used to offset the mortgage payment.
If the current principal residence is a pending sale, but the transaction will not be closed (with title transfer to a new owner) prior to the new transaction, both the current and the proposed mortgage payments must be used to qualify the borrower for the new transaction. This sometimes occurs unexpectedly when an escrow is delayed or when an employee is transferred to a new location and buys a new home before the previous home sells.
Who can afford to pay cash for an additional home without first selling their primary residence? Surprisingly, more than four out of 10 investment buyers and more than three in 10 vacation-home buyers paid cash for their properties, with large percentages indicating that portfolio diversification was a factor in their purchase decision, according to recent study by the National Association of Realtors.
All cash for real estate -- proof that somebody thinks it's a good idea.
For answers to your real estate questions, call Allison at 970-468-6800. Email - [email protected]. Allison is a long time local in Summit County. Summit Real Estate – The Simson/Nenninger Team is located at the Dillon Ridge Marketplace. Allison’s long-time residency and years of real estate experience can help you make the most of any buying or selling situation. She’s a Certified Residential Specialist (CRS), the highest designation awarded to a Realtor in the residential sales field. Her philosophy is simple, whether buying or selling, she understands that the most important real estate transaction is yours. Want to know the value of your Summit County property? Visit www.SummitHomeValue.com