It is great time to buy a home, but not such a great time to sell one.  As a result, many smart investors are taking advantage of declining real estate prices by buying a “move-up” home and turning an existing home into a rental.

If you are considering this option, be aware that new guidelines are coming into effect that makes it more difficult to purchase a home as a primary residence with the intention of keeping and renting an existing residence.  The reason behind the new guidelines is due to what is now referred to as “Buy and Bail.” It is becoming a huge problem and FHA, Fannie Mae and Freddie Mac are dedicated to putting a stop to it. Buy and Bail happens when a borrower purchases a new primary residence and then allows an existing home to go to foreclosure once escrow closes on the new residence. 

To reduce the number of “Buy and Bails”, lenders are requiring that:

•You will need to have a minimum of 30% equity in your existing home
•You will need a copy of your new Rental Agreement on your existing residence and a copy of the tenants deposit check
•You will need to demonstrate the capacity to repay and be current on any debt obligations.

What if you do not have 30% equity in your existing home but still wish to
purchase a new primary residence?
The good news is you can still purchase but you will need to:
•Provide a down payment. The amount depends on the particular loan program in which you are applying for.
•Be able to qualify for both payments. The existing payment and your new proposed payment.
•Have sufficient funds left in the bank as reserves for both properties.

Although certainly more stringent, these steps are needed to insure the long-term health of the real estate market and the long-term health of your investment.

Aimee Ritz,Town & Country Home Loans & Shea Hutchinson, Century 21 Hometown Realty