Coming in February 2018 underwriters will need to consider more information before using rental income to qualify a borrower.  Agencies, banks, credit unions, and broker shops will adjust guidelines based on risk in their loan portfolio.  So far I have not read any articles or reports that rentals have become an issue for FHLMC.  However, I do know in the last two years they opened more financing to borrowers.  These guidelines included moving the maximum number of financed properties from four to six, and removing the two-year history of property management to use rental income to qualify.

FHLMC Rental Income Rules Change

In bulletin 2017-12 FHLMC made these statements that explained the changes

We are now announcing revised rental income requirements and guidance with a focus on housing industry trends and matters impacting the current and historical analysis of stable monthly rental income.

  • Proactively address evolving housing industry trends in the rental market such as short-term rental income (e.g., rental income typically derived from sources where a lease is not utilized)
  • Support successful and sustainable homeownership through responsible lending practices
  • Include expanded requirements, additional specificity and guidance to support the determination of stability, reasonable expectation of continuance and calculation of rental income, resulting in continued support of purchase certainty

There is a good amount of changes that need to be reviewed but I wanted to point out some of the major points to the change.

More documentation required to use rental income:

Much of the bulletin is focused on the new requirement to verify if the rental income is short term or long term.  Short term being vacation rentals and long term meaning annual rental to one party.

For long term rentals, the borrower must have a 1-year history on their tax return and confirm that the rental agreements are long term.  The guidelines published allow a few different methods for this verification.  You can provide the lease or review the appraisal for the term.

For rental income that is short term, the borrower must have a 2-year history.  Additionally they must confirm current rental receipt to use the rental income.

These rules regarding confirming short term versus long term will apply to both the subject property and other rental properties.  For all rental types FHLMC also will require the seller to confirm that the income is still on going and supports the rental shown on the schedule E.

Refer to these new guidelines in section 5306.1(c)(ii)

Borrowers with no rental management history have restricted rental income requirements

Over the last few years FHLMC has backed away from their requirement to have a 2-year history of rental income.   This is no longer the case as FHLMC has now put in place a maximum of 30% of your qualifying income can come from rental income when the borrower lacks a full tax year of rental income.

Refer to these new guidelines in section 5306.1(c)(ii)

Properties financed by the borrower but owned in an 1120S or 1065 business

FHLMC will treat rental income as self-employed income when the borrower personally financed a property and later transfers ownership to a business.  This applies regardless of the percentage ownership.  This is a different stance than FNMA takes on this issue, but honestly one that is a bit easier to do the calculation on for sure.

Refer to these new guidelines in section 5306.1(e) and 5306.1(d)

Summary

To wrap it up there are additional rule changes underwriters will need to know for FHLMC.  These changes are some of the bigger changes to be aware of in 2018.  These new guidelines will apply to all loans that close on or after February 9 , 2018.  So we have a little bit of time before we see the change in underwriting process.  Be informed, it is better to be ahead of the game on these things.

Good luck and keep sharp on the guidelines changes, we will be making a few adjustments to UberWriter and updating the training videos that change with this announcement so stay tuned to our site to keep up on the changes at www.uber-writer.com