Getting Stricter; Fannie Mae has new rules for conversions of residences to investment property.(Marketing Maven)(Federal National Mortgage Association)

Byline: Kim Payne

It used to be easy to retain the old residence when your borrower wanted to move up to something bigger and better. Retaining that residence can make lots of sense. This is often the first venture into the world of owning investment property and becoming a landlord. The residence could also be converted into a second home in many situations; as an example, for empty nesters who have lived in areas where it's cold in the winter and are now moving to the Southern part of the U.S. They can use the former residence as their second home during the hot summer months and come back to the new home down south in the winter months. True snowbirds, if you will.

But now, boy have the rules changed.

Fannie Mae has issued new rules which are detailed and it's critical that not only that you know every one of them, but your real estate agents and builders know them, too.

The first change: rental income can only be used if there is remaining equity in the rental property of at least 30% of the property value.

This very important addition often excludes potential buyers from moving up and retaining the residence. The rule does make sense from a risk perspective. With so many borrowers walking away from overmortgaged/undervalued properties, and particularly non-owner-occupied properties, proof of equity gives assurances that pains will be taken to keep that property and keep the rents coming in (since it's assumed we used that rental income to qualify or at least offset the principal and interest/tax and insurance payment).

So how to prove there is 30% remaining equity? Fannie Mae has given three options: a full appraisal from a licensed appraiser, the use of an automated valuation model, or using a broker price opinion.