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Fannie Mae – Lease Requirement for a Retained Departure
Question:
Is a lease ALWAYS required when a person’s current primary residence is being converted to rental? Are the guidelines stating that Form 1007 is acceptable in lieu of a lease? The agency handbook has us confused!
Answer:
Yes, the lease is always required for this scenario (converting primary residence to investment).
Here is what is likely causing the confusion:
The guides call for a lease to be used at lender discretion (meaning in certain cases instead of a Schedule E) when rental income is being used to qualify for a property placed in service in the current calendar year, for example, when converting a principal residence to an investment property, the lender is justified in using a fully executed current lease agreement to document rental income.
That said, the guide says you can use a 1007 to verify the market rents identified on the lease, OR you can pursue terms the lease went into effect by means of bank statements, etc., showing two months’ receipts or copies of the security check and one month’s rent. Generally speaking, the two months of bank statements showing receipt of rent can be difficult because it is rare that a borrower would move out of their primary residence (current primary) until they close on the new home (new primary).
But….a lease would always be required, and the lease agreement must be supported by either:
Form 1007 (Single-Family Comparable Rent Schedule) or Form 1025 (Small Residential Income Property Appraisal Report), as applicable
OR
Evidence that the terms of the lease have gone into effect, which may include:
– Two consecutive months’ bank statements or electronic transfers of rental payments for existing lease agreements, or
– Copies of the security deposit and first month’s rent check with proof of deposit for newly executed agreements
Supporting Resources
Our subscribers have access to our “Rental Income – All Agency Comparison Chart,” located under Guideline References/Charts & Checklists” in the “All Agency” category.