Strong Treasury auction results last week, particularly for the 10-year notes and 30-year bonds, drove mortgage rates to their lowest levels of the Summer season. The bid-to-cover ratio, a measure of how many people wanted to buy the notes versus how many actually did, in all three auctions were at or near the best levels seen in over a year. Indirect bids, typically from foreign entities and non-primary dealers, was near 50% for each auction. The stronger than expected demand in recent auctions eases concerns, at least temporarily, that investors will begin to require higher yields to continue purchasing an expanding supply of notes and bonds. Currently the 30 Year Fixed sits at 4.625% (4.804% APR) and the 15 Year Fixed is at 4.250% (4.557% APR). This week, the market looks to monthly inflation reports in the form of Producer Price Index on Tuesday and Consumer Price Index on Wednesday. Retail Sales, which accounts for approximately 70% of economic activity, will also be released on Tuesday.
Borrowers looking to qualify with rental income are facing a few new challenges. Gone are the days of simply providing a copy of the current fully-executed lease agreement in order to prove the amount of rental income generated on an investment property. In an effort to tighten underwriting guidelines in the wake of the worst financial crisis since the Great Depression, investors are taking a much more conservative approach to borrowers utilizing rental income to meet debt ratio requirements.
Most investors now want to see evidence of landlord history before allowing borrowers to qualify with rental income. Generally, borrowers must demonstrate at least a two-year history of managing 1-4 unit investment properties. Rental properties must appear on Schedule E of the previous years tax returns, and the net rental income used for qualifying will be calculated directly from the Schedule E. Homeowners looking to purchase their first investment property must now qualify with both housing payments, in addition to making a 20% minimum down payment.
Homeowners looking to purchase a new primary residence and convert their existing primary residence into a rental property are also subject to new qualification standards. In order to qualify with rental income, homeowners must be able to document a minimum 30% equity position in the converted property under the “buy and bail” guidelines, Fannie and Freddie’s answer to buyers attempting to purchase a new primary residence before they make the decision to “walk away” from their current residence with no equity or negative equity.
In some instances, borrowers must also document additional cash reserves in order to utilize rental income for mortgage qualification purposes. The reserves are required to supplement payments during vacancies and/or make regular or emergency repairs to the property as necessary.
Contact your mortgage professional for additional details regarding the changing landscape of rental income qualification.
Central Coast Lending, Inc.