Portrait of mature couple talking in living room with coffee while at homeFannie Mae has made a policy change that could make it easier for some homeowners that are looking to convert their home into an investment property and gain rental income.

Under the new rules, there are no minimum equity requirements in order to convert your property into an investment property. According to data recently released by RealtyTrac, there are 7.4 million Americans who owe more on their home than it’s worth. They could especially benefit from the program.

The Changes

Fannie Mae is making things a little easier on clients looking to convert a home they don’t have much equity in into an investment property, as long as they can find a new primary residence.

Under the old rules, potential conversion candidates had to have a minimum of 30% equity in their home. This minimum requirement has now been wiped out completely. This means that even clients that owe more on their home than its current value can convert to an investment property and use the rent to help pay the mortgage on that property. Meanwhile, they can move into a new home.

Also changing are the reserve requirements. Previously, you needed at least six months of payments available to cover principal, interest, taxes and insurance. This requirement has been removed as well. As long as you qualify for both mortgages, reserves aren’t necessary.

The new policy represents the latest in client-friendly deals put together by Fannie Mae. These began with the HomePath program to give people some money to make repairs when they were buying a Fannie Mae-owned home.

That program ended last year and was refocused to as a 3% down payment option with closing cost assistance for first-time home buyers purchasing Fannie Mae properties.

Requirements

As with any major financial transaction, there are a few requirements that must be met. The biggest of these is that you must qualify for your new primary home while still maintaining the mortgage on your newly converted investment property.

The other big one is making sure you have a rental agreement signed for a period of at least a year. You also have to have the security deposit in your account.

The good news is you can use up to 75% of the monthly rent as qualifying income for the purposes of your debt-to-income (DTI) ratio to qualify for your new primary residence and maintain the mortgage on the converted investment property. The remaining 25% is a vacancy factor used to account for time between renters and may not be considered part of qualifying income.

The only other catch is that rent cannot come from family members.

Refinance Alternatives

Maybe the idea of being a landlord until you can pay off the first mortgage doesn’t appeal to you. It’s not for everyone. You’re responsible for the maintenance in the event that anything goes wrong. You also have to find new tenants when the old ones move out.

There’s also the distinct possibility that you like where you live and are just looking for a way to get your equity moving in a positive direction.

If that’s your situation, you might want to take a look at HARP or an agency streamline to get refinanced into a better loan. The other nice thing about these particular programs is that they apply for both Fannie Mae and Freddie Mac funded loans.

Does this sound like something that might be right for you? If so, you can start the application process here. Have a question? Let us know in the comments.

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