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On its' pursuit to crack down on buy and bail, the mortgage industry might actually escalate the problem.
Just curious, if anybody knows of anybody who is in either of these situations?
Case A:
A few years ago, my brother moved out of the area and rented their house out well above upkeep costs. Now, if he were to come back, in spite of still having a rental contract, he won't have a place to live because:
A) he can't buy another house because "rental" income isn't counted as income and his salary won't necessarily fully cover two mortgages
B) why would he rent a place if he already has a house? doesn't that beat the point?
Basically, he should evict his renters... and live back at his place... but of course that has all sort of wrong implications.
Case B:
You can currently afford your mortgage, but your underwater because prices have dropped over 40%+. You found a good job elsewhere so you have to do "something" about your home. You want to keep your house because you may come back to it in the future, or would like to keep it as a rental for long term growth.
You would like to rent the old place out to mitigate your losses... but, you can't count "rental" income as a criteria to get another loan. With the amount your currently paying in mortgage you can in effect afford to pay for TWO new mortgages because prices have dropped over 50%.
So, basically, the mortgage industry is forcing you to stay at one place even though in theory you can keep your old place with rental income and take advantage of moving by your new job and still net savings.
So, in effect, the mortgage industry is encouraging you to foreclose rather than rent your old place out and get another place.
Numbers:
mortgage on first place: 2200
mortgage on new place: 1200 (get a slightly smaller place and the 50+% price drops results in a waaaay lower payment)
rental income on first place if rented out: 1800
2200
-1800
+1200 1600 monthly outlays vs. the original 2200
So in theory, you can still be better off if you can rent your old place and buy the new place... but the new restrictions prevent you from doing this. So, I guess it's better to foreclose?
A legitimate avenue to mitigate losses has all of a sudden become unacceptable. Expect more foreclosures, not less with the new policies.
No takers? Did lenders think about the implications of what their "new" policy would be?
No doubt, there are people that are going to buy and bail... but how many more people who have the money will now definitely foreclose when they become 50%, 60%, 70% underwater?
How many more people will foreclose when 30, 40, 50% of homeowners become underwater?
When I applied for the mortgage on the second home last month, you must document income to support both mortgages at the same time. They will not count rental income unless you can document at least 20% equity in the old home.
Plus the lender will want significant downpayment (20% or maybe it's 30% now depending on the size of the mortgage) for second home in order to qualify for the best interest rates.
They stopped the buy and bail mortgage fraud game last September.
So go ahead and buy that second home if you can support both mortgages at the same time (the lenders will want to look at all of your assets and if they see you barely have enough for just the downpayment with nothing left in reserves, you may not qualify).
If I were your brother, I would just do a short term rental (as short as possible until the lease on the home that he is currently renting out expires) and just move back into that home if he can still afford to make the payments.
But it seems like you say the mortgage industry is forcing your brother to leave his house and go into foreclosure even though he can make the payments. That's up to him to decide. You will ruin your credit. He can't buy a home for a few years.
Who knows, the government may further restrict FHA loans and prevent people from owning homes for 7 years like the private industry. That's a moral and financial decision your brother will have to make. He's got to do what's best for him.
I am new here and have come to seek advice myself, but I read your post and thought I would comment. I have friends in MI where the quality of life for them has plummeted, and they are in a similar situation. They live in an old (historic) home that they purchased for a steal of a deal at 80k many years ago, and they renovated it over time to make it a beautiful place. However, life in their town has actually dropped into an unsafe environment and they want out. The very old, gorgeous "mansion" across the street sold last year for 35k, and their own home is worth even less now. He was offered a job in another state, and had to turn it down because he was going to have to buy a home in the new state and subsequently walk away from his present home. Morally he couldnt do it. He lives in fear for his family's safety where he is now (there are so many gunshot injuries all around they dont even report them all anymore), his home is almost worth nothing (there are homes selling for less than 10k all around him), but he still hesitates. Soon, I think something will happen and he will walk, but he cant have two mortgages, cant rent his own place, and is 'stuck' and trying to hold off as long as he can. He is an engineer with great income, but his world is a very different one from yesteryear...Sad.
When I applied for the mortgage on the second home last month, you must document income to support both mortgages at the same time. They will not count rental income unless you can document at least 20% equity in the old home.
Plus the lender will want significant downpayment (20% or maybe it's 30% now depending on the size of the mortgage) for second home in order to qualify for the best interest rates.
They stopped the buy and bail mortgage fraud game last September.
So go ahead and buy that second home if you can support both mortgages at the same time (the lenders will want to look at all of your assets and if they see you barely have enough for just the downpayment with nothing left in reserves, you may not qualify).
If I were your brother, I would just do a short term rental (as short as possible until the lease on the home that he is currently renting out expires) and just move back into that home if he can still afford to make the payments.
But it seems like you say the mortgage industry is forcing your brother to leave his house and go into foreclosure even though he can make the payments. That's up to him to decide. You will ruin your credit. He can't buy a home for a few years.
Why would he get rid of a good revenue cash flow (his rent is higher than his mortgage)? And why would he rent? Basically it's punishing him for being smart and doing what people have always done to increase overall wealth.
Who knows, the government may further restrict FHA loans and prevent people from owning homes for 7 years like the private industry. That's a moral and financial decision your brother will have to make. He's got to do what's best for him. The government can go ahead and restrict all it wants... the more restrictions PAST the point of how things used to be pre-bubble is going to cause foreclosures to increase, and housing prices to fall. I guess the government is STILL fighting for the investor classes because at some point, those are going to be the only ones able to buy anything.
And that's the problem with this. You may be cash rich but house poor, but you still can't rent out your old home to get a net reduction in total payments.
I'm talking about people who have enough for substantial down payments, and reserves, but their first place has become underwater (in spite of paying over 20% down - since house has crashed over 40%). Instead of being able to buy and rent a place out to lower total net outlays, they can't because they changed the rules.
All this is GREAT for the investor class.... those who bought a house pre-2000 (so far) and haven't used their houses as an ATM. As more and more people go underwater... this group is greatly diminishing. What are you going to do when both houses are underwater? AND rents come down? As more and more people decide it's just not worth it? The Game is rigged against them.
And that's the problem with this. You may be cash rich but house poor, but you still can't rent out your old home to get a net reduction in total payments.
I'm talking about people who have enough for substantial down payments, and reserves, but their first place has become underwater (in spite of paying over 20% down - since house has crashed over 40%). Instead of being able to buy and rent a place out to lower total net outlays, they can't because they changed the rules.
All this is GREAT for the investor class.... those who bought a house pre-2000 (so far) and haven't used their houses as an ATM. As more and more people go underwater... this group is greatly diminishing. What are you going to do when both houses are underwater? AND rents come down? As more and more people decide it's just not worth it? The Game is rigged against them.
-chuck22b
That's the problem with this whole housing crisis. The ones that can afford it will have to end up making a financial decision. Either we just eat the 100-400K lost out of our own pockets or just walk.
That's why the government is making a huge mistake with this partial bailout of homeowners. Either bail out everyone or no one.
The wealthier people can just walk and rebuild their lives much quicker than the lower income people.
If the wealthier people walk, this will create more downward pressure on housing prices.
What's the government's next step if this partial homeowner assistance does not work?
Location: central, between Pepe's Tacos and Roberto's
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I cannot disagree with the OPs argument. The fact of the matter is that lenders and mortgage insurance companies have overreacted in their contraction.
On another note though, the equity in an existing rental property is a non-issue if you have 2 years schedule E's that can be provided and a rent schedule from an appraiser. If the landlord has been renting out the property for 2+ years then there should be no problem providing these items, and 75% (dependent on investor guidelines) of the rental income is allowable as income.
I cannot disagree with the OPs argument. The fact of the matter is that lenders and mortgage insurance companies have overreacted in their contraction.
On another note though, the equity in an existing rental property is a non-issue if you have 2 years schedule E's that can be provided and a rent schedule from an appraiser. If the landlord has been renting out the property for 2+ years then there should be no problem providing these items, and 75% (dependent on investor guidelines) of the rental income is allowable as income.
Thanks Daddy for the info,
But what about the underwater part? You have to have 30% equity? to be able to use rental property as income? I read this somewhere as to the new guidelines by the GSE. What about the change from 2 months of Reserves to 6 months of Reserves?
All these changes in rules are killing the middle class and traditional wealth creation.... But, it's a boon for the investor classes. They now have fewer competition for buyers... depreciated assets... and now the GSEs are allowing them to take on more property It's a boon time for investors! Sucks to be a typical homeowner... or someone looking to buy a home soon.
Quote:
The government-sponsored enterprise told lenders last week that starting next month it will buy or guarantee home loans made to borrowers that have mortgaged as many as nine other properties. Currently, Fannie will not touch a loan if the borrower has financed more than three other homes.
The change is meant "to bring added liquidity to the investor segment of the market and help hasten the recovery," Fannie said.
However, the GSE, which said it wants to make more loans available to "high-credit quality, bona fide … experienced investors," is tightening other requirements for this type of borrower. Starting in June, an investor will have to hold six months of payments in reserve, rather than two months, to get a single-family loan approved by Fannie's automated system.
Location: central, between Pepe's Tacos and Roberto's
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The 30% rule as I understand it only applies to your current primary residence to be converted to a rental property. Keep in mind that, again as I understand it, many of these new guidelines do not necessarily apply (lender's interpretations may vary) if you are purchasing a primary residence. This would include not only the amount of properties financed but the required reserves as well.
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way to think things out.
It's a boon time for investors! Sucks to be a typical homeowner... or someone looking to buy a home soon.
