Keep Your Current Home and Turn It Into a Rental

Sean Trombetti

Hi Everyone, Welcome back to another episode of the reliant mortgage solutions podcast. I'm Sean, and as always im here with james to discuss everything mortgage. Today the topic is a unique one and fairly technical, but It could be a great way to get into real estate investing! Fannie Mae just adjusted their requirments for converting a primary house into an investment property when your moving to a new home. Lets get into it!

Sean Trombetti

So, picture this. You find the perfect new house, but you want to keep your current home as a rental property instead of selling it. Naturally, you go out, write up a lease agreement with a future tenant, get it signed, hand it to your lender, and expect them to count that rent toward your income, right?

Sean Trombetti

Except Fannie Mae has a rule for departing residences that throws almost everyone for a loop. They explicitly prohibit using a signed lease agreement to establish qualifying rental income on the home you are moving out of. You literally cannot use a lease.

James Eveld

It sounds totally counterintuitive, right? People hear that and go, wait, what? You do not want my signed contract? But when you think about it from an underwriting perspective, um, people were rushing out, drafting questionable leases or getting a buddy to sign something just to qualify for the new mortgage. So Fannie Mae said, nope, lease agreements are not permitted for any departing residence. End of story.

Sean Trombetti

So, okay, if a lease is completely off the table, how on earth do we prove to an underwriter what the place will actually rent for?

James Eveld

Well, they look at actual market rent data instead. The lender documents it through an appraisal that includes a Single Family Comparable Rent Schedule, which is known as Form 1007. Or, um, they can use market analysis tools like Zillow, Redfin, or the local MLS. But if you use those online platforms or MLS data, the lender has to document at least three comparable rental properties in the same local market area.

Sean Trombetti

Which, honestly, is a massive relief for buyers. I mean, think about the pressure that takes off a homeowner. In the past, you were scrambling to market your house, screen tenants, and sign a lease months before you even closed on your new primary residence, all while packing up boxes.

James Eveld

Oh, it was a total nightmare logistically! I had clients doing gymnastics trying to line up move in dates with closing dates just to satisfy underwriting. Now, if you are sitting on a three percent mortgage rate from a few years ago, you do not have to give up that incredible rate or panic about finding a renter before you even get the keys to your new place.

Sean Trombetti

Right, you just evaluate the market rent through the appraisal or those three comps, run the math, and keep moving forward.

James Eveld

Now, the math on this is where people sometimes get tripped up, because you do not get to use one hundred percent of that market rent to offset your mortgage payment.

Sean Trombetti

Yeah, let us walk through the actual numbers. How does Fannie Mae calculate what they call Adjusted Net Rental Income?

James Eveld

Okay, so step one. You take the documented gross monthly market rent and you multiply it by 75 percent. That 25 percent reduction accounts for potential vacancy and ongoing maintenance. So, um, if the appraisal or market comps show your departing home can rent for $3,000 a month, you multiply $3,000 by 75 percent, which gives you $2,250 of qualifying income.

Sean Trombetti

Okay, two thousand two hundred and fifty. Then step two?

James Eveld

Step two, you subtract the full monthly housing payment on that departing home, the full PITIA. That means principal, interest, taxes, insurance, and any association dues. If that final net rental income number is positive, it offsets your old mortgage payment up to zero for qualifying. But if it comes out negative, say your total payment is $2,500 and your qualifying rent credit is $2,250, that remaining $250 difference gets added directly to your debt to income ratio as a monthly liability.

Sean Trombetti

And that difference can make or break your qualifying ratio for the new home if your debt limits are tight.

James Eveld

Exactly. But there is another layer here that catches so many first time landlords completely off guard. The reserve requirement.

Sean Trombetti

Ah, the six month reserve rule. Talk about a surprise mid underwriting if you are not prepared for it.

James Eveld

It catches people all the time! Under Fannie Mae guidelines, if you have less than 12 months of documented property management experience, you are required to hold six months of reserves to cover the full PITIA obligation for that vacated property. And that six month reserve calculated by the lender is completely in addition to any standard reserves required for the main transaction.

Sean Trombetti

Right! So if your departing home payment, including taxes and insurance, is $2,500 a month, six months of reserves means you need $15,000 sitting in verified liquid assets, completely separate from your down payment and closing costs on the new house.

James Eveld

Yeah, $15,000 liquid, untouched. If a buyer comes in thinking they can stretch every penny of their savings into the down payment on the new house, and we discover three weeks into underwriting that they need an extra fifteen grand in cash reserves because they have never managed rental property before, the whole deal stalls out.

Sean Trombetti

I see that all the time. Homeowners have built up substantial equity over the past five or six years, and they want to hold onto that low rate and leverage their equity. But if we do not map out those reserve requirements and calculate the 75 percent factor right at the start, it creates massive stress.

James Eveld

Planning ahead is everything. Knowing you can keep your home without rushing a tenant lease agreement is a huge advantage, as long as you have the asset reserves lined up.

Sean Trombetti

Bottom line, it is a fantastic wealth building strategy, you just have to do the math upfront. Good stuff, James.

James Eveld

Always good chatting, Sean. Talk soon.

Sean Trombetti

And thanks everyone for listening to another episode of the reliant mortgage solutions podcast. Take care!