Changes Coming For Investment Properties

Using leases to qualify will require Proof

Insider

Chief Operations Officer, Atlantic Bay Mortgage

Change is a word we are getting all too familiar with. So, what is the skinny on the upcoming changes? Some of the changes are positive and some are negative. The challenge is in the fact that, once again, Fannie Mae and Freddie Mac do not fully align.

The first point worth mentioning is the implementation date. Fannie Mae’s changes required implementation with new applications since Jan. 1, 2024. Meanwhile, settlement dates must implement Freddie’s changes as of April 1, 2024. For those that are unfamiliar with the term “settlement dates,” that means the loan must be purchased by Freddie by April 1. As you can see, just within the implementation dates, how that makes rolling out the changes a bit of a challenge. I will add that both may be implemented prior to the implementation date.

Let’s start with the changes that Fannie Mae made:

Historically, to use qualifying rental income on a non-subject property, you did not have to have previous history as a landlord. With these upcoming changes, they are adding in the landlord history requirement on non-subject property rental income.

With these changes, to use rental income, you cannot have “placed into service” a new investment property since your last tax return and live rent free.

Previously, a lease could be used on a property that has become a rental property less than a year ago. No evidence was required to ensure the lease was legit. With these changes, the lender will be required to evidence the lease amount by one of three things. You will need 1007/1025 appraisal addendum that shows the rent is in line with the fair market rental value, 2 months bank statements showing that amount being deposited, or copies of the security deposit and first month rent check.

The changes … are certainly aligning to the overall goal of ensuring that this type of income is documented and legitimate.

Now, let’s cover the changes that Freddie is making:

To use a new lease on an investment property that did not have previous rental income, the date in which rental payments must begin will need to be on or before the first mortgage payment.

Previously the lease had to be supported with 1000/72 appraisal forms (to show the lease amount is in line with fair market value) or two months’ receipt of rent. With these changes, they will allow you to provide a copy of the first month’s rent and security deposit in lieu of the aforementioned requirements.

Also worth mentioning is that both agencies will be removing the restriction for a lease to be good for a minimum of one year. As you can see above, Freddie had historically taken a more conservative approach to rental income guides. I think the changes all around are certainly aligning to the overall goal of ensuring that this type of income is documented and legitimate. Honestly, in my opinion, these changes make sense. As an industry, we should always be verifying that the lease agreements are viable and accurate. I know this will be perceived as a negative change; however, we should embrace these changes to ensure we are putting folks into homes that they can afford.