70% LTV on Property #1 to qualify for conventional on Property #2
Realtor · Big Bear, CA · Member since 2018 · 54 posts · 18 votes
We bought our primary residence 10/06/2017. We found a Duplex that we would like to buy and make into our new primary residence using a conventional loan.
I emailed a lender and she said I would need 70% LTV on our primary residence (soon to be rental) in order to qualify for a new owner-occupied loan?
Our DTI is 25%.
Anyone have experience with this? And/or can you recommend lenders for conventional loans that would not require this?
I know part of the answer will be to contact more mortgage brokers :)
Thanks,
@Matt Pitch-Maxon,
Sounds like you are getting some different opinions, and all are valid. The reason you are getting the different view points is because there are 2 sets of guidelines in play, in general. One, is a Fannie Mae or Freddie Mac guideline (referred to as conventional or conforming, loosely the same thing), which is a baseline guideline to be able to sell those loans on the secondary market because they meet the GSE guideline, and then on top of that, the individual mortgage lenders may have their own set of guidelines that go over the top of the base guidelines. The individual lender guidelines are referred to as "over-lays" because they "lay over" the top of the base guideline. These came about after 2008 when lenders were getting loan buy back requests left and right. Each lender can have their own over-lay. It's risk mitigation to each lender.
Here's a link to the Fannie Mae sellers guide and is indicative of the base guideline:
https://www.fanniemae.com/content/guide/selling/b3/3.1/08.html
The 70% LTV you were quoted as needed to have with your current home sounds like a lender over-lay that I mentioned above, its not required by all lenders.
Kerry's comment above is your true hurdle here, when trying to buy another house using owner occupied financing, you haven't lived in your current house for 12 months. If you go back into your paperwork from when you bought the house last October, read through your note, the instrument that says you will pay back the loan, yadda, yadda....part of every note states that you agree to owner occupy the house for a period of no less than 12 months. If you go to any lender at this point, there is a 99.9% chance they will decline the loan request or counter you to investment financing, which is more cost and more down payment. If you buy another owner occupied house now, you are violating the note you signed last October.
Without being too wordy (I already am), once October comes and goes, there is also a subjective hurdle here and that is buying a duplex to live in when your current home is an SFR. Lenders wont typically buy that unless there is a concrete reason and or hardship which would make that move make sense like moving significantly closer to work, or taking in an aging parent, etc, etc...The reason for that is because in a typical scenario, people want to move out of a duplex and have more room in an SFR. When you are going the other way, the underwriter will raise an eyebrow and question motives. Many more thoughts, but will stop it here...Hope this is helpful.
@Jonathan Pflueger, thanks for thinking of me!
what type of loan did you buy the primary w/ first time around?
Conventional/conforming (I'm not sure if there's a difference) with 5% down. No fha or other similar program.
@Matt Pich-Maxon, you haven’t held your initial primary very long, not yet a full 12 months. So, that is one issue. Do you have any experience as a landlord? Lenders often want to see 2 years landlord experience before counting rental income. That may be another issue. You don’t have any rental income as of now, either, as the last primary isn’t rented.
These issues may be why the lender is concerned about the 70% LTV. What to do? 1. Seek owner financing on the duplex. 2. Stay where you are and wait. 3. Seek lenders for whom these issues aren't red flags...probably small local community bank or credit union. 4. Save up a larger down payment and buy the plex unit as an investment property.
@Matt Pitch-Maxon,
Sounds like you are getting some different opinions, and all are valid. The reason you are getting the different view points is because there are 2 sets of guidelines in play, in general. One, is a Fannie Mae or Freddie Mac guideline (referred to as conventional or conforming, loosely the same thing), which is a baseline guideline to be able to sell those loans on the secondary market because they meet the GSE guideline, and then on top of that, the individual mortgage lenders may have their own set of guidelines that go over the top of the base guidelines. The individual lender guidelines are referred to as "over-lays" because they "lay over" the top of the base guideline. These came about after 2008 when lenders were getting loan buy back requests left and right. Each lender can have their own over-lay. It's risk mitigation to each lender.
Here's a link to the Fannie Mae sellers guide and is indicative of the base guideline:
https://www.fanniemae.com/content/guide/selling/b3/3.1/08.html
The 70% LTV you were quoted as needed to have with your current home sounds like a lender over-lay that I mentioned above, its not required by all lenders.
Kerry's comment above is your true hurdle here, when trying to buy another house using owner occupied financing, you haven't lived in your current house for 12 months. If you go back into your paperwork from when you bought the house last October, read through your note, the instrument that says you will pay back the loan, yadda, yadda....part of every note states that you agree to owner occupy the house for a period of no less than 12 months. If you go to any lender at this point, there is a 99.9% chance they will decline the loan request or counter you to investment financing, which is more cost and more down payment. If you buy another owner occupied house now, you are violating the note you signed last October.
Without being too wordy (I already am), once October comes and goes, there is also a subjective hurdle here and that is buying a duplex to live in when your current home is an SFR. Lenders wont typically buy that unless there is a concrete reason and or hardship which would make that move make sense like moving significantly closer to work, or taking in an aging parent, etc, etc...The reason for that is because in a typical scenario, people want to move out of a duplex and have more room in an SFR. When you are going the other way, the underwriter will raise an eyebrow and question motives. Many more thoughts, but will stop it here...Hope this is helpful.
@Jonathan Pflueger, thanks for thinking of me!
I really appreciate the well thought out and helpful responses. My apologies for not responding sooner... I was on an 8,000 mile road trip to look at various markets and I was not on the internet for much of the journey.
@Joe Stretch If I own a 3 unit and I want to purchase another 3 unit, Will an under writer approve the 2nd 3 unit with no problem? You mentioned going from SFR to MFR, underwriter may question it, wondering if its a problem from 3 doors to 3 doors.
Also, We are looking at purchasing our 1st 3 unit.
We are looking at a product through Freddie Mac called Home Possible which would allow us to put 3% down.
This is actually the very product we are considering and weighing the options vs FHA.
Would we see a conflict from the under writers perspective is we chose this product over FHA when it came time to buy our 2nd property? in other words, is choosing fha advantageous in terms of going from a 3 unit to another 3 unit? Or is there no difference if we went with Home Possible because by and large the issue is moving from 3 unit to 3 unit or SFR to Multi family.
We are looking at purchasing multiple multi families and will owner occupy so I suppose What I am really asking is,
What is the best strategy to pursue multiple house hacks? Starting FHA, then doing conventional (Home Possible)? Would really appreciate your insight.
@Matt Pich-Maxon, what will be your DTI if/when you go ahead with the duplex buy?
Afaik, if your primary is an SFR, you should be able to apply for a Fannie Mae investment loan up to 85% LTV against it.
Is the duplex at least 100 miles away from your current primary? [FHA requires that in order to allow the income from your ex-primary to be included in your DTI (afaik), but I'm not aware if conventional requirements are the same].
Breaking your I'll-live-there-1-year-seasoning promise could also factor in. [Not official advice]. Good luck...
@Antonio Porta Great thoughts, great questions...so few insights on this. I will try to be brief. First of all, keep in mind that both the programs you've mentioned are designed and set up for first time home buyers who don't have a huge down payment, they are not set up for real estate investors, so a strategic approach is warranted.
With the Freddie program, to do units, you would need 5% down instead of 3%. You will also need to find a lender that underwrites directly to the program and does not "over-lay" the guidelines by limiting you to 1 unit. This link may help:
http://www.freddiemac.com/homepossible/
For FHA, you can do the units, but for 3 or 4 units on FHA, the property must cash flow. What that means is that the market rent for each unit (including the one you would live in) would need to total more than the PITIMI payment (Principal, Interest, Taxes, Insurance, Mortgage Insurance). The mortgage insurance for FHA now is expensive and is forever, but the pricing is usually better. If you have the down payment for either program, use the final payment as the measuring stick...this will also help longer term cash flow.
Ultimately, if you don't own a home now (making that assumption), buying units for a first home is a fantastic idea, but assuming you would keep those units and try to buy more units, you may find some challenges there, depending on the situation.
Keep a couple things in mind...You can only have 1 FHA loan at a time. To an underwriter, going from units to a SFR is a more natural thing than the other way around. What you buy as owner occupied, per the note you will sign, you would need to live there at least 12 months. Knowing the caveats of the lending programs can be very valuable knowledge with your mind set. Hope this was helpful!!!
Thank you for that long, well thought out, reply. Love the detail, very helpful!
I heard from a mortgage guy that FREDDIE MAC's Home Possible is tightening their belt, reducing the 147ish income down to 89kish on July 29th, though the median income may be adjusted, but not likely to help our situation. We are looking at a property in a high census area, which by default, Home Possible will not be allowed. It was suggested by our mortgage guy to submit an address on a property we are likely considering by end of day tomorrow (Thursday) so it will be grandfathered in (the loan will).
Are there any great mortgage books you like etc that will help gain insight on different loan products/ underwriting guidelines ?
@Antonio Porta I read a lot of books, but none on mortgages. The opinions I am sharing with you is based off my own experiences over the years. Keep seeking the knowledge though, the more you can learn from other's successes and failures makes our own paths a little more stable...
@Matt Pich-Maxon, what will be your DTI if/when you go ahead with the duplex buy?
Afaik, if your primary is an SFR, you should be able to apply for a Fannie Mae investment loan up to 85% LTV against it.
Is the duplex at least 100 miles away from your current primary? [FHA requires that in order to allow the income from your ex-primary to be included in your DTI (afaik), but I'm not aware if conventional requirements are the same].
Breaking your I'll-live-there-1-year-seasoning promise could also factor in. [Not official advice]. Good luck...
@Matt Pich-Maxon, what will be your DTI if/when you go ahead with the duplex buy?
Afaik, if your primary is an SFR, you should be able to apply for a Fannie Mae investment loan up to 85% LTV against it.
Is the duplex at least 100 miles away from your current primary? [FHA requires that in order to allow the income from your ex-primary to be included in your DTI (afaik), but I'm not aware if conventional requirements are the same].
Breaking your I'll-live-there-1-year-seasoning promise could also factor in. [Not official advice]. Good luck...
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