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Renting out existing property and buying a new primary residence


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I spoke with my realtor last night. My family has outgrown the home we are in and the plan was to rent out this home and take advantage of these ridiculously low rates and buy a larger home to live in. Apparently, many people want to do the same thing and lenders have scaled back the ability to do this. According to my realtor, we must have 25% equity in the first home to be able to buy a second home and rent out the first. I totally see WHY lenders would require an equity cushion, but this was the first I had heard of this general rule.

Can anyone in the mortgage industry confirm this?

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Maybe, not if.........you were to refinance the first mortgage as your principal home, to a conforming loan. This would clear you away from the FHA loan. You would need to satisfy the residency requirements (six months??) and most likely have to pay mortgage insurance, or take a rate increase and have lender paid mortgage insurance.

After the residency requirements are met, then you would be able to purchase your new home via FHA (lower down payment).

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Hmmm. Complication. Primary residence is conforming. Wife on note only. About 15% equity at this point. Rental property is in my name. This loan is FHA. Roughly 15% equity in that home. Don't want to sell either. If I refi'ed that property, I'd probably be at non-owner occupied rates. And that could be costly.

I think, and this would really be pushing it, if we absolutely had to, we could pay down both mortgages on the properties to have 20% equity. But that would leave $0 for a down payment and clean out our emergency reserves. :?

I don't know. Trying to balance the need for a larger home, the ability to taek advantage of the best rates we'll see in our lifetimes, and not taking on more deby than is manageable.

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OK few points here.

1. You currently have an FHA loan, so you wouldn't be able to obtain another. You'd need to go conventional financing. Even if this wasn't the case, the rule you are asking about applies, AKA the "buy and bail" rule. HUD wrote a mortgagee letter detailing the equity requirements etc download here. Note that there are some exceptions, see point #3.

2. With respect to conventional financing, here is a guideline from August 2008, I can't find an update but this is still in effect. Here is an excerpt from page 6: Conversion of Principal Residence to Second Home or Investment


"Fannie Mae will continue to permit up to 75 percent of

the rental income to be used to offset the mortgage

payment in qualifying if there is documented equity of at

least 30 percent in the existing property (derived from an

appraisal, AVM, or BPO, minus outstanding liens).

The rental income must be documented with:

• a copy of the fully executed lease agreement; and

• the receipt of a security deposit from the tenant and

deposit into the borrower’s account.

If the 30 percent equity in the property cannot be

documented, rental income may not be used to offset the

mortgage payment.

Both the current and the proposed mortgage

payments must be used to qualify the borrower for

the new transaction; and

6 months of PITI for both properties is required to be

in reserves."

3. In other words the key similarity (on Fannie/Freddie/FHA) is whether or not you get to count the rental income in your debt to income ratio. This is determined by whether you have the equity requirement or not.

4. If you can A) qualify for both mortgage payments without offsetting with the rent, or B) have enough cash reserves; you can skate by this one. I have successfully funded more than a few loans in this manner.

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oompa, thank you for taking the time to explain in detail. I suppose I am unfortunately "trapped", and must sell one home or the other before buying a trade-up home. I sort of came to this conclusion over the past few days. Unfortunately, after transactional costs, we'd lose about $35000 on this house if we sell it, but them the brakes sometimes. On the bright side, we were making double and triple mortgage payments on this thing for the past few years and we avoided being severely underwater.

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