03-16-2012 12:04 PM
We are considering purchasing a new property, while keeping our existing house as a rental. Wondering if anyone knows the latest loan qualification requirements in this situation (i.e. how much equity you need in each of the properties, debt-to-income ratio etc. ) I realize it may vary from lender to lender, but if there is a general guideline here I have yet to find it. Thanks for any input.
03-17-2012 09:52 AM
Thanks BR for the shout out.
If you do not have a prior history of rental property management (2010, 2011 1040's) then the departure residence payment will be added into your debt to income ratios. Your income is $4,000. New house payment is $1,000. Old house costs $1000 per month. $2,000 total housing expense / $4,000 income = 50% debt to income ratio. Some transactions can be approved with a 50% DTI so don't lose hope over this requirement. Let a mortgage professional look at all options and see if things can go forward "as is".
Let's say you have some documented rental property experience showing on your returns. You'll need 25% equity in your departure residence (verified more often than not with a $300 appraisal), a deposit check from your new renters written, deposited in to your account, and cleared as good funds prior to using the income from that renter to offset your house payment.
Why the strict guidelines? If you look at the percentage of defaults by ownership type, investor property loans are far and away the worst offenders. Because of this you're going to pay the price in both additional scrutiny and heighten controls over how rental property income is calculated.
If you can't get by with both house payments in your DTI, my best recommendation is to vacate your home, rent it for 90 days, then buy. Lenders will use that income since it's now visible to offset a portion of the departure residence payment for qualifying for your new home purchase. Yes, it may mean moving twice. If you want to keep your current home, it's helpful to get a taste of what it's like to be a landlord for a short period of time before committing to another home purchase.
Thanks for reading,
03-17-2012 10:34 AM
JW stated: "If you can't get by with both house payments in your DTI, my best recommendation is to vacate your home, rent it for 90 days, then buy. Lenders will use that income since it's now visible to offset a portion of the departure residence payment for qualifying for your new home purchase. Yes, it may mean moving twice. If you want to keep your current home, it's helpful to get a taste of what it's like to be a landlord for a short period of time before committing to another home purchase".
Obviously, the FLAW in the above scenario is that, in moving out to make your present place a rental, for the requisite 90+ days, requires you to move out. So, where do YOU go? ( Unless your new tenant allows you to live with them, which isn't too likely.)
There aren't many families who are agreeable to undergoing such a double move - believe me, I've tried - so, in the real world, it's not really a viable scenario. Not that there aren't places to rent, for 3-6 months - apartment complexes, mostly. It's just not a move many families will seriously consider, even though it can obviously help to bridge the qualification/equity gaps, of your initial scenario.
You can also sell your present residence, have cash in hand, rent for a few months, and then buy your new place, non-contingently, but, that too, requires a double move. ( Which most wives I've dealt with won't consider, especially if there are children involved.)
Bottom line? Either have a LOT of equity in the old house, PLUS, a BIG down payment, ( 20%+, in CASH.) or be prepared for some serious house buying gymnastics. A good Realtor can/will be as helpful as a good lender rep, in coming up with viable solutions.
Good luck in sorting out your options.
Bob Phillips - Realty ONE Group - South Orange County, CA
03-17-2012 11:39 AM
I've had many people take this path.
They see value in renting a home for a bit, getting a feel for the neighborhood, perhaps even waiting for the right floorplan to come on the market instead of the rental they live in. It's not for everyone, but an option to consider other than selling (assuming you can. the OP hasn't indicated if theres any equity to extract) A measured purchase process with all factors investigated first prevents most, but not all of course, problems down the road.
Thanks for reading,
03-18-2012 01:19 PM - edited 03-18-2012 01:25 PM
John - I am in a similar predicament. I would like to rent my existing home (for investment purposes - I have some equity). and purchase a new one. I don't have a residential rental income in the last 2 years, but I own a 122 unit apartment complex with an investment parter under an LLC. This property is professionally managed, but I am heavily involved in all decisions - and of course financially on the hook. Will the lender usually accept the income from this investment as prior rental income?
Also, using 'normal' loans, what is an acceptable DTI if I were to count both payments? I have heard that 41% of gross income for all mortgage, prop tax, insurance, etc. was the max.
thanks for the great info,
03-18-2012 05:13 PM
My guess, since I don't have an application, is that your current property management experience will allow an Underwriter to make an informed decision on counting any rental income for your departure residence. 41% debt to income is a soft ceiling with 45-50% being the absolute top.
Debt to income is one thing. Cash reserves is another. Automated Underwriting Systems (AUS) really like to approve loans where there is 12 months of PITIHOA in liquid to semi-liquid (401k, IRA) accounts. The reserves are for both the primary and rental property. You do not need cash reserves for any large scale rental properties that are in an SCorp, LLC, or other form of ownership as you do with individual properties.
Thanks for reading,