Converting a Primary Home Into a Rental Home

How Can I Convert a Primary Home into a Rental Property?

I get a lot of questions from clients who are converting a primary home into a rental home (especially here on Saint Simons Island where vacation rentals are a hot commodity!) and how that will impact their qualification for a new home. The first thing to keep in mind is that many lender do not allow you to own more than 4 financed properties (Fannie Mae allows up to 10 and so does BrandMortgage, but some lenders have more restrictive overlays). This can be a tricky process, but here are some tips to guide you through that process (effective as of 03/15/2016):

Conventional Mortgage Loan Guidelines (Fannie Mae)

You may use projected rental income to offset your current mortgage payment which is excellent. This can significantly increase the amount you qualify for on your new home. In order to use the new rental income, you must provide the new executed lease agreement from your new renters and a copy of the cleared security deposit from said renters. After all this has been documented, you can use 75% of the gross rental payment to offset your total mortgage payment (including taxes, insurance and HOA dues if applicable).

Even if you don’t use the new income, you must also have at least 2 months of liquid payment reserves for each additional second home or investment property after closing if you own 2-4 financed properties and you must have 6 months of payments reserves for each additional second home or investment property if you own 5-10 financed properties.

FHA Mortgage Loan Guidelines

FHA’s requirements are a little more strict. First, the property you are vacating must be at least 100 miles from your new home. Second, you must obtain an executed lease agreement that covers at least 1 year from the date of closing on your new home and evidence of payment of the security deposit or first month’s rent. Third, in order to use that income to qualify for a new mortgage (or offset the old payment), your lender will have to obtain an appraisal on your current home with a market rent analysis to confirm your rental agreement is in line with market conditions. The appraisal must also prove that you have at least 25% equity in your current home.

These are the two most common situations, but there are other requirements for USDA and VA mortgages. Your specific scenario may dictate a different strategy and guidelines change constantly, so be sure to contact me for more details on your situation today!