Pre-qualification calculator: buying new home and keeping old

November 16th, 2010

Many homeowners are looking at the current housing market as an opportunity to convert their existing home into an income property and purchase a new home. Before using the mortgage prequalification calculator for this scenario make sure you are aware of the qualifying guidelines.

Guidelines

Some lenders may be tighter on these guidelines, but at a minimum here are some guidelines for you to keep in mind if you intend to retain your existing home as a rental and purchase a new home.

To qualify any rental income on your existing home you must:

If you are missing any of these elements then you will not be able to have any rent received for your existing home credited to your income for qualifying to purchase your new home.

To further tighten the requirements, if a lender is following these guidelines a rent survey from an appraiser will be required to verify the rent you are receiving and stated on your lease agreement is consistent with your local market.

For the six-month PITI reserves the security deposit from your tenant will not be counted. If you are using retirement accounts for reserves only 65 percent of the balance will be counted by most lenders — some lenders will not use retirement accounts for reserves in this type of scenario.

For the reserves if your current housing payment, including taxes and insurance, is $1,275 per month and the mortgage calculators indicate your new PITI will be $1,950 per month you will need a total of $19,350 in your asset accounts after your new purchase closes ($1,275 + $1,950 = $3,225; $3,225 x 6 = $19,350).

As you can see Fannie Mae and Freddie Mac are not excited about helping you become an income property owner.

Pre-qualification calculator

There are two ways to approach the pre-qualification calculator with your scenario: conservative or hopeful.

The hopeful approach is to assume you will have someone willing to sign a lease on your current home and give you a deposit before your new home closes and they are able to move in. In fact such a deposit will need to be made well in advance of the prospective tenant moving in since you will have to verify the transaction for the mortgage underwriter before final loan approval and closing.

If you follow the hopeful approach, on the pre-qualification calculator subtract 75 percent of the rent you will be receiving from your PITI on your existing home. If 75 percent of the rent is greater than your current housing payment add that amount to your income for qualifying. If 75 percent is less than your current PITI take the negative amount and add it to your “other monthly obligations.”

If you follow the more conservative approach ignore the potential rent for your existing residence and add the entire monthly housing payment to your “other monthly obligations” to determine your new home loan amount.

Note of caution

One more factor that is not able to be determined using any mortgage calculator and that is the believability of occupancy for the new home. Underwriters are carefully examining the home you are purchasing in relation to the home you are currently occupying. If it appears you may be moving to a smaller home, or even one of the same size, the underwriter may feel you are purchasing the new home as income property and retaining your current home as your primary residence.

If you are considering retaining your current home as an income property and purchasing a new home as your primary residence it has to be absolutely apparent to an underwriter that this is what you are actually doing.

As a follow up to this type of transaction many lenders are ordering “door knocks”. After a month or two following the close of your transaction a representative or subcontractor for the lender actually knocks on the door of your new home to see if you are living there, in some cases they are also knocking on your current home’s door as well to see if you have moved. Be forewarned, if you are purchasing a home as an owner occupant, you’d better occupy.

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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