Fannie Mae's Departure Residence Guidelines
If you currently own a home and want to buy a new one, you might be surprised at how complicated the process is. If you sell your current home before purchasing a new home, you might find yourself temporarily between homes. If you want to buy a new home first, you'll need to abide by the guidelines of your lender. If you need or want to rent out your current home, things become even more complicated. The Federal National Mortgage Association (FNMA), better known as Fannie Mae, provides financing for many conventional mortgages. Fannie Mae has requirements you need to meet to qualify for a new mortgage if you plan to rent out your current home.
What Is a Departure Residence?
Fannie Mae and Freddie Mac define a departure residence as the home that is currently owned and resided in by the borrower looking to mortgage a new home.
Borrowers who currently own a home typically have three options when they decide to purchase a new principal residence. They can:
- Sell the current residence and pay off the outstanding mortgage
- Convert the property to a second home, assuming they can qualify for both the existing and new mortgage payments
- Convert the property to an investment property and provide documentation that they will rent the property and use the income to offset the mortgage payment
In July 2008, both Fannie and Freddie significantly tightened underwriting guidelines regarding departure residences due to the financial crisis. In June 2015, they finally loosened these restrictions.
Departure Residence Guidelines From 2008 to 2015
The sometimes overbearing “departure residence” guidelines were imposed during the height of the financial crisis and intended to be temporary in nature despite lingering for more than six years.
The purpose of this policy had been to ensure that borrowers have adequate capacity and financial reserves to manage multiple properties successfully.
In July 2008, Fannie Mae laid down these underwriting guidelines regarding homeowners buying additional properties:
- They will need to verify 30% equity in their current home. This mitigates concerns that they may be considering a "strategic default" on the old home. An Automated Valuation Module (AVM) or appraisal will be needed to prove their equity position.
- Rental income must be documented with a fully executed lease agreement. The lease may be month-to-month.
- The lender will require a copy of the security deposit and proof of deposit.
- Rental income from a family member or an individual with an established relationship to the borrower is not allowed.
- 75% of the verified rental income can be used to offset housing expenses.
In particular, the 30% equity requirement was difficult for homeowners to meet.
Departure Residence Underwriting Guidelines
Today's departure residence guidelines are significantly looser than they were in the wake of the financial crisis. The 30% equity requirement is gone. If you are selling your current residence but the sale isn't completed, the current residence's principal, interest, taxes, insurance, and association dues (known as PITIA) won't count against you if you provide documentation. You'll need to provide your lender with an executed sales contract and confirmation that any financing contingencies have been cleared to qualify.
When it comes to rental income from your departure residence, Fannie Mae requires you to provide documentation in the form of a lease agreement or tax return and the completion of the appropriate forms. You can use the rental income to offset the costs associated with your departure residence so those costs don't count against you when you purchase a new home. Fannie Mae wants to make sure you have enough income to handle your mortgages. If you have a renter lined up, along with a signed lease agreement, you should be in good shape.
The 2015 changes significantly simplified things for many would-be homebuyers. You have a bit more flexibility and a few more options than you would have had immediately following the financial crisis.