Guidelines for Renting Out Your Current Home & Purchasing A New One: Can You Qualify?

June 15th, 2010

Mortgage rates are at historic lows, and property values have dropped. This may just be a great opportunity to convert your current home to a rental property, and purchase a new primary residence. Many families are seeing the current real estate market as a chance to expand their real estate holdings. As you use a free mortgage calculator to consider such options, here are some underwriting guidelines to be aware of.

Prior Guidelines

Prior to June 2008, if you wanted to vacate your current residence, rent it out, and then purchase a new property as your primary residence, you could do so using conventional financing by presenting a lease agreement for your existing home with your mortgage application for the new home. The underwriter would consider 75% of the rents on the lease agreement as qualifying revenue to offset the existing principal, interest, property taxes and insurance (PITI) payments on the home to be rented.

New Conventional Mortgage Guidelines

However, as the mortgage and credit crisis swept through the markets, Fannie Mae and Freddie Mac changed their underwriting guidelines.

For borrowers converting their current residence to investment properties and purchasing a new primary residence, the income-to-debt ratios were tightened to improve loan quality. Now, unless all of the following guidelines are met, no rental income will be considered for qualifying purposes for the new loan, and the entire PITI payment for both properties must be considered:

If 30% equity cannot be documented, then rental income cannot be considered and the borrower must have enough reserves to cover six months PITI for both properties–and gift funds cannot be used for reserves.

Thus, unless you are certain that you have 30% equity in your existing home, then include your entire current PITI (including mortgage principal and interest, property taxes, and homeowners insurance, plus HOA dues, if applicable) as a debt when using a mortgage prequalification calculator.

FHA guidelines for converting an existing residence to a rental and purchasing a new home have one major difference. FHA will not allow borrowers to have more than one FHA mortgage unless the second FHA mortgage is required because of relocation, or is at a significant geographic distance. Here are the FHA qualification guidelines for including rent when converting an existing primary residence to an investment property:

The major difference between the FHA and conventional mortgage underwriting guidelines is the reserve requirement for conventional mortgages that is not a FHA requirement. Due to the low required down payment as well as not needing six months PITI for both properties in reserve, many families converting existing homes to rental properties are using FHA financing to purchase their new residence, when possible.

Current Market Opportunities

Unless you are certain you have either 25% or 30% equity in your existing mortgage, count your entire current housing payment as an obligation when using a free mortgage loan calculator. With the current market conditions of low home prices and historically low mortgage rates, you may consider expanding your real estate holdings. Be sure you are aware of these underwriting guidelines as you do so.

Posted By :
Dennis C. Smith is co-owner and broker of record for Stratis Financial in southern California. He has over twenty years' experience in the mortgage industry

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