Today I pre-approved a buyer who wants to buy a new primary residence while renting his current home.

This wasn’t a big issue a few years back but now the guideline are much stiffer because of the possibility that someone wants to “buy and bail”. This is a term that I never really heard until after 2008 when property values dropped and people were substantially upside down on there mortgage. In other words they owed more than the house was worth.

Typically when someone currently owns a home and they decide to buy a new principle residence they have 3 options:

1. Sell the current home and payoff the mortgage

2. Convert the property into a second home assuming they qualify with both the existing and new house payments.

3. Convert the property to an investment property and provide documentation that they will rent the property and use the income to offset the mortgage payment.

Number one is obvious and needs no real explanation but 2 and 3 have ifs’ that must be considered. With option 2 the second / vacation home must be far enough away from the new principle residence so that it can be considered as  a second / vacation home. From my experience lenders typically want to see at least a 100 mile distance between properties. No you can’t buy the house down the street and call your current home a vacation home.

Under conventional guidelines if you do want to buy the house down the street you may be able to take advantage of option 3 and use the rental income to offset the mortgage payment if:

1. You have a fully executed lease agreement with a security deposit received, documented and deposited.

2. You must have at least 30% equity in the house. This can be determined with a current appraisal, an AVM (Automated Valuation Model) or a BPO (Broker Price Opinion) less any outstanding liens. Most lenders require an appraisal.

If 30% equity cannot be shown then you can still rent the house but you cannot use the rent to offset the mortgage payment and you must qualify with both the current and the new house payment. Also, you must document at least 6 months reserves for both properties. For example if the current and new PITI including any mortgage insurance total $2000.00 then you need $10,000 in reserves. This can be liquid or accessible retirement funds.

A second financing option would be an FHA insured loan. Keep in mind though that typically you are only allowed one FHA loan at a time. There are extenuating circumstances that may allow you have more than one FHA loan but usually no more than one.

Under FHA guideline you may use rental income to offset mortgage payments if either one of these apply:

1. If you are relocating with a new employer  or being transferred by your current employer to an area not within reasonable commuting distance. A fully executed lease agreement must be provided with proof of security deposit or first months rent.

2. Sufficient equity in the home of at least 25% is documented by either an appraisal no more than 6 months old or by comparing the current principle balance with the original purchase price. So if you bought the house for $100,000 and you owe $75,000 you should be OK.

Also, keep in mind whether utilizing conventional or FHA financing lenders only let you use 75% of rent to offset the mortgage payment including taxes, insurance and mortgage insurance; the other 25% is considered maintenance expense. For example if your current house payment is $1000 including property taxes, homeowners insurance and any mortgage insurance then only $750.00 can be used to offset that; meaning that you would still have a negative $250.00 per month that must be included when calculating your monthly debt to income ratios.

It is very important when getting pre-qualified that your loan officer understands these guidelines and knows how to apply them to your situation. If they don’t ask you questions like:

1. What kind of loan do you have now on your current home
2. How much do you owe
3. Why do you want to move to another home

Then they may be providing you with a false approval and you will be in for a very aggravating loan process.

I help people all over Arizona with there mortgage needs feel free to contact me with any questions or concerns. My primary goal when working with someone is to make sure I provide a true and valid pre-approval while at the same time making the loan process as head-ache free as possible.

Advertisement

---