This past August, Freddie Mac released Bulletin 2017-12, in which they announced several changes, both enhancements and restrictions, in regards to rental income. These changes are effective with all settlement dates on and after February 9, 2018, however they will allow implementation of the changes in their entirety immediately. PRMG will be requiring that all loans funded on or after Tuesday, December 26, 2017 follow the new requirements.
Freddie Mac has indicated they are making the changes to:
- 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
We encourage you to read about the changes directly in the Freddie Mac seller guide (section 5306.1) which can be accessed here: http://www.freddiemac.com/singlefamily/guide/. Changes include:
- Rental income calculation updated to detail how the principal portion of the mortgage payment is accounted for in the DTI.
- Freddie Mac is more closely aligning with Fannie Mae in the treatment of the principal portion of the mortgage for rental properties.
- Net cash flow from the tax returns is calculated and then the PITIA is deducted from the net cash flow.
- Rental income allowed up to a maximum of 30% of the qualifying income when the borrower does not have a documented one-year history of investment property management experience.
- Additional guidance on how to document and calculate rental income from short term vs long term sources is provided.
- Short term rental sources (such as nightly or weekly rentals) require minimum two years’ tax returns to support income stability and continuance.
- Long term rental sources may be eligible with one year’s tax returns with an original lease agreement of at least 12 months.
- Form 998 is retired and form 1000 with comparable rent data reactivate
- Expanded requirements and added additional guidance in regard to:
- Accessory units by specifying rental income may be used for an accessory unit in a 1-unit subject investment property and non-subject investment property when specific requirements are met.
- Non-subject investment properties by specifying the property type may be non-residential
- Subject Investment Properties by removing the requirement to verify operating expenses when rental income is not used to qualify
- Establishment of debt payment-to-income ratio by separating requirements by occupancy and property type and specifying treatment of multiple non-subject investment properties.
- Leases by specifying that leases must be current and fully executed, with a minimum original term of one year (with an allowance for a month-to-month term if in the automatically renewable stage) for all transaction type
PRMG has updated the Income Calculation Worksheets, which are available on the Resource Center in support of the Freddie Mac changes.