A twist in guidelines is resolved, allowing for refinancing

Mortgage broker:

ProMortgage.

Property type:

Appraised value: Loan amount: Loan type: Rate: APR: Backstory:

Liz Bayer,

Single-family home in San Francisco’s Bayview neighborhood.

$1.525 million.

$450,000. 30-year fixed. 3.125%.

3.208%.

A new client reached out to me about refinancing her investment property with the objective to take advantage of the huge amount of equity. She wanted to take $200,000 cash out to make home improvements.

She was living with her son “rent free” because she was helping him with maintaining the home and family while he worked. Her credit was outstanding and she had very little debt.

However, news to me was that Freddie Mac guidelines do not provide for financing an investment property if the owner does not own their primary residence.

I asked why and was told that this was a guideline put into place a couple of years ago because there had been instances where a borrower was trying to qualify for a mortgage by using rental income to help them qualify. However, the borrower never had intended to rent the property and planned to live there instead.

If this had been disclosed upfront, the borrower would not have qualified for the mortgage because they did not have sufficient income.

This issue drove up mortgage defaults which is why the guideline was put into place.

In my humble opinion, this might make sense as a guideline the transaction was a purchase; however, my client had rental history for the subject property on the Schedule E of her tax return, so it seems like that should have been sufficient evidence that she did not live there.

Fortunately, Fannie Mae guidelines were less restrictive and if the owner showed that they were paying rent on their primary residence, then the borrower would qualify to obtain mortgage financing on the investment property.

So, my borrower established a lease agreement and showed proof of rent payments to meet the requirement, and we successfully proceeded with the refinance.