Buying A Home While Owning Another

Listed below are some additional terms used when referencing these types of transactions.

Vacating Primary Residence

Primary to Rental

Conversion to Investment

Conversion to Rental

Conversion to Second Home

There are essentially two types of borrowers in this situation:

Those that are Over-Mortgage (No Equity) and those that have equity, but want to retain their current home.

OVER-MORTGAGED

Here’s a common scenario in today’s market. A borrower owns a home that is currently their primary residence. There is a mortgage of $230,000 but the property is worth $140,000 in the current market. They see a newer home for $180,000 that is bigger and in a nicer neighborhood; so they decide to take advantage of the lower prices and buy another home.

Some borrowers plan to buy the newer home and then let the current one foreclose. This is called “Buy-and-Bail” in the industry. This type of transaction, while not illegal, is highly unethical. I would encourage anyone contemplating a buy-and-bail to avoid it at all costs. There are many reasons to avoid this; most importantly is the legal liability of what they are doing. To accomplish a buy-and-bail, borrowers, Loan Officers and Realtor’s, that assist them, are most likely producing fraudulent documents to achieve a closing of the new loan. That constitutes Bank Fraud. Lenders have up to five years after a foreclosure to “collect” on their losses; and as time goes on they are going to become more and more aggressive about litigating these cases.

EQUITY IN RETAINED PROPERTY

Some borrowers do in fact have equity in their current residence. However they may want to wait and sell when the market rebounds or retain the property as part of an investment portfolio.

There are several things to be aware of prior to making application for the new mortgage when you have an existing home. To make it easier to understand we will break them down by loan type as we have done in our other posts.

CONVENTIONAL FINANCING

Borrowers who have 30% or greater equity in the home they are converting to a rental will be able to use 75% of the total rental income towards off-setting the mortgage payment ON THAT PROPERTY. It is important to note that many Loan Officers miss this vital point – The countable rental income (75%) can not go towards total income to qualify for the new property, only to help cover the current mortgage. In addition to this the borrower will need to supply the following documents at application:

1. A fully signed lease for the home they are converting to rental
2. Copy of security deposit/first months rent check from tenant
3. Proof the funds form the deposit have cleared in to the borrowers account
4. Equity needs to be proven with a 2055 Exterior Appraisal

For borrowers that have less than 30% or NO Equity at all – NONE of the rental income can be used for qualification or to help off-set the current mortgage payments. This boils down to the borrower needing to make enough monthly income to cover BOTH the old and new mortgage payments, taxes and insurance (PITI).

In addition to the income the borrower will need to show they have 6 Months of PITI for BOTH properties. This means that the borrower needs to have enough assets to cover both PITI payments of each property for SIX months. These funds need to be from an acceptable source or in the possession of the borrower for no less than 60+ days. They can not be borrowed, however they can be Gifted to the borrower from an immediate family member.

FHA FINANCING

Borrowers may use rental income from a converted primary. The percentage allowable is determined by the local FHA HOC for a given area, but is 75% in most all cases. The use of the rental income is allowed when:

1. The borrower is relocating with a new or existing employer to an area that is considered not to be within a reasonable commute. This is allowable even if the borrower has no equity in the current home.

-OR-

2. If the borrower has a current loan-to-value of 75% or less in the residence. This can be determined by either a 2055 appraisal or by producing the original HUD statement from the closing on the current home showing the original purchase price compared to the current loan amount.

For borrowers that have less than 30% or NO Equity at all – NONE of the rental income can be used for qualification or to help off-set the current mortgage payments. This again comes down to the borrower needing to make enough monthly income to cover BOTH the old and new mortgage payments, taxes and insurance (PITI).

As with Conventional financing the borrower will need to show they have 6 Months of PITI for BOTH properties. This means that the borrower needs to have enough assets to cover both PITI payments of each property for SIX months. These funds need to be from an acceptable source or in the possession of the borrower for no less than 60+ days. They can not be borrowed, however they can be Gifted to the borrower from an immediate family member.

VA FINANCING

VA makes this pretty simple. There are no Equity needs and rental income can be used to off-set the current mortgage payments only, and can not be used to qualify for the new mortgage. Borrowers need to supply a copy of rental agreement or lease, if they have one.

Obviously, there are many, many possible scenarios within these guidelines above. It is vitally important that you work with someone that is seasoned with and knowledgeable when it comes to these types of loans. As always, we are here to assist or answer any questions you may have about this. 

Credit Report / Score Maintenance

Today, more than ever before, credit scores are evaluated for just about everything we do. From mortgages to utility service, your score is vital.

Keep in mind that while your creditors report your activity once a month, the reporting agency only updates your profile 4 times a year. Since your score is a product of what is on your credit report; I recommend that you obtain a copy of your report, from all three major credit reporting agencies, at least two times per year. The best time to request would be January and July.

Requesting a copy is easy and FREE. Since we are each allowed ONE free copy from each of the THREE major reporting agencies, it is best to order only ONE at a time. This provides you with the opportunity to check each report, address any mistakes, and then pull another one.

Obtaining your TRULY FREE report can be done online at one site. Do not be fooled by TV ads with catchy songs and flashy graphics. The link below is a true free site.

Here is the link: http://www.annualcreditreport.com

Be aware of the little pitfalls in their system:

1. Do not upgrade/pay to see your credit score. The score will NOT be the same as what a creditor will pull and is a waste of your money.


2. Check the box that hides the first 5 digits of your Social Security Number once the report is created. This will ensure your privacy and secure your SSN in case the report is stolen or misplaced.


3. Only order ONE report at a time. You can return to the site and order the others as you need. Remember that it is ONE from each of the THREE One Time a year.


4. Be sure to print your report and do not save it on their system for the 30 days.


If you do not have access to order the report(s) online you can request them directly from the bureau as listed below:

- Equifax: (800) 685-1111
- Experian (formerly TRW:(888) 397-3742
- TransUnion: (800) 888-4213

Getting A Mortgage After a Short Sale

  Getting a mortgage again after a Short Sale or Deed-In-Lieu can be difficult; but if you follow these simple guidelines to qualify you will be well on your way to owning another home. Both a Short Sale and Deed-In-Lieu are preemptive ways to avoid Foreclosure, but both are viewed as a default in the eyes of the lending industry.

  Let’s begin with the definition of Short Sale. The lending industry calls this a “Pre-Foreclosure Sale” meaning that the lender allows you to sell the home (collateral) before the lender takes it from you in a formal process called a foreclosure. The term “Short Sale” comes from the lender accepting a sale price for less than is owed. The “Date of Event” for a Short Sale will be the date of the closing as per the HUD1.

  A Deed-In-Lieu of foreclosure is offering your deed of ownership to the lender to avoid the home being taken from you in a formal foreclosure. The “Date of Event” for Deed-In-Lieu will be the date on which the new deed and title was recorded.

  It is important to point out that the following guidelines are not the same as when someone has lost their home through a formal foreclosure. See our post about qualifying for a new mortgage if you have a Foreclosure on your credit – Click Here.

  The following rules and guidelines are currently in place as of the publishing of this post. We will do our best to keep this post updated as changes are made. As we do in all our guideline type posts, the easiest way to break them down is by Loan Type. We encourage you to email or phone us if you have specific questions.

CONVENTIONAL FINANCING

  The amount of elapsed time from the date of event will vary based on the new Loan-To-Value (LTV). The table below outlines these time lines and LTV’s.

ELAPSED TIME	MAXIMUM LOAN-TO-VALUE
Less than 24 Months	Not Allowable
24 Months	80%
48 Months	90%
72 Months	Standard Guidelines

  As you can see, 2 years is the absolute minimum amount of elapsed time. Unlike other obstacles to qualifying such as Bankruptcy or Foreclosure, there is no waiver of the two years for extenuating circumstances.

FHA FINANCING

  There are two distinct ways to qualify for a new FHA mortgage if you have a Short Sale on your credit.

  In Default at time of Short Sale = 3 Years - If the borrower was in default or behind on payments at the time of short sale there is a 3 year waiting period. There is an exception to this for those that had experienced a hardship such as death of a primary wage earner, long term illness etc. Generally these events need to substantiated as being beyond the control of the borrower. Additionally, all other credit accounts and installment credit history must show as being made on time prior to the event.

  Not in Default at time of Short Sale = No Waiting Period – If the borrower made payments on the mortgage within the month due for the 12 months prior to the short sale along with any installment (ie Auto Loan) payments and the short sale was accepted by the lender as payment in full, they qualify for FHA financing immediately.

  Contrary to popular thinking, a short sale can be accomplished WITHOUT being behind on payments. Unfortunately some lenders and real estate professionals inform clients that they need to miss two or three payments before they will be considered for short sale approval. This is not accurate. In some cases such as job relocation, medical reasons, and family needs, a non-default short sale is possible. While not easy to achieve, they are and can be done with the help of a good attorney.

VA FINANCING

   VA guidelines call for a two year waiting period since the date of event. Some borrowers may qualify prior to the 2 year anniversary; however it can be difficult to get approval. The VA has the following rules for qualifying inside the 24 month window:

  Applicant or Spouse has re-established credit since the date of Foreclosure
  and can show that the foreclosure was caused by extenuating circumstances
  beyond their control.

  Divorce is not generally viewed as being beyond the control of the applicant or spouse

  We try to break down the information to make it as easy to understand as possible. We are always happy to answer any specific questions you may have or assist you in obtaining financing.

Getting A Mortgage After Foreclosure

  If you are looking to finance a home purchase after a Foreclosure, you will need to know some important details before making application. We will cover Short Sales and Deeds in Lieu of Foreclosure in another post

First, it is important to know how lenders define a Foreclosure.

Foreclosure:     When a creditor (Lender/Bank) repossess/takes back a home that had a mortgage/note that was not being paid for a specified period of time.

  Once the Deed and Title to the property is reassigned to the Lender/Bank that held the note/mortgage on that property we have a Foreclosure. In some states the Lender/Bank must go through the court system and formally serve the owner with a notice of intent to foreclose; sometimes referred to as a “Lis Pendens.” If the owner is able to sell the home either through a short sale or regular sale, before the Foreclosure is complete, it is not considered a Foreclosure; it is considered a Pre-Foreclosure Sale and not part of the following rules and guidelines.

The following rules and guidelines are currently in place as of the publishing of this post. We will do our best to keep this post updated as changes are made. The easiest way to break this down will be by Loan Type. As always, if you have specific questions please email or phone us.

CONVENTIONAL FINANCING

  Currently there is a SEVEN year waiting period for borrowers with a Foreclosure on their credit to qualify for Conventional (non-Government) loan programs. The seven years are calculated from the date ownership was transferred. This would be the date that the new Deed was filed showing that the Lender/Bank officially owned the property.

  For those borrowers that had experienced an “Extenuating Circumstance” the timeline is reduced to THREE years. The definition of an Extenuating Circumstance is “ Non-Recurring and was beyond the applicants control which resulted in a sudden, significant and prolonged reduction in income or a catastrophic increase in financial obligations.” Divorce and the impact of the economy are generally not acceptable reasons. I say generally because in some situations a case can be made.

  For those borrowers that are past the Seven or qualify for the Three year waiting period; re-establishing credit is mandatory. Here are the points to keep in mind:

       Credit must be up to date as of the date of application

       Minimum of 4 Credit References open for 24 months

                1 Must be a Traditional Credit Source – ie: Credit Card or Car Payment

                1 Must be Housing Payment – ie: Rent

                2 References may be Non-Traditional – ie: Auto Insurance or Cell Phone

       No more than two 30 Day Late payment over the past 24 months

       No Late Housing/Rent Payments since the date of Foreclosure

       No New Judgments, collections, garnishments, liens or foreclosures since Foreclosure

FHA FINANCING

  Currently there is a THREE year waiting period for borrowers with a Foreclosure on their credit to qualify for FHA loan programs. The three years are calculated from the date ownership was transferred. This would be the date that the new Deed was filed showing that the Lender/Bank officially owned the property.

    For those borrowers that had experienced an “Extenuating Circumstance” an exception can be granted at any time within the Three year waiting period. For FHA, Extenuating Circumstance includes “serious illness or death of a household wage earner, but does not include the inability to sell the house due to a job transfer or relocation to another area.”

  The re-establishment of credit is necessary for borrower within the Three year waiting period.

VA FINANCING

   With VA guidelines the existence of a previous foreclosure does not disqualify the loan by itself. However, it has been our experience, that qualifying within 24 months has been difficult to accomplish. The VA has the following rules for qualifying inside the 24 month window:

    Applicant or Spouse has re-established credit since the date of Foreclosure
    and can show that the foreclosure was caused by extenuating circumstances
    beyond their control.

    Divorce is not generally viewed as being beyond the control of the applicant or spouse

  We hope you found this easy to understand. While it is as complete as possible in this format, there are other nuances that need to be taken in to consideration. We are happy to answer any specific questions you may have or assist you in obtaining financing.

Mortgage Rates Keep Going Lower

  Each time economic data is released or major events happen anywhere in the world, markets react in some sort of way. Lately, markets have been somewhat subdued as the reports have been mixed with both good and not so good data, although it has been positive for mortgage rates which keep going lower. Freerateupdate.com's daily survey of wholesale and direct lenders show that mortgage rates changed this past week for the better.
 
  Conforming 30 year fixed mortgage rates started the week at 4.750%, dropped by .250% and now are at 4.500%. 15 year fixed mortgage rates also dropped by the same .250% and are at 3.750%. 5/1 adjustable mortgage rates are at 3.000%, a drop of .125%. These are the best mortgage rates available with 0.7 to 1% origination fee for well qualified borrowers. After remaining stable for some time, mortgage rates seem to be heading lower at what is usually one of the busiest seasons of the year.

  FHA mortgage rates also repriced for the better. FHA 30 year fixed mortgage rates are at 4.250%, and FHA 15 year fixed mortgage rates are at 4.000%, both down .250%. FHA 5/1 adjustable mortgage rates are at 3.375%, down .275%. FHA mortgage loans offer a low down payment, but borrowers must be prepared to pay additional FHA fees and an upfront mortgage insurance premium which results in higher FHA closing costs (APR). FHA's recent increase in the annual mortgage insurance premium has resulted in a slow down of recent FHA mortgage applications.
 
  Jumbo mortgage rates also did well this past week which should be a boost for high end home buyers. Jumbo 30 year fixed mortgage rates decreased by .250% and are at 5.125%. Jumbo 15 year fixed mortgage rates went from 5.000% in the early part of the week to 4.500% in the latter part of the week. Jumbo 5/1 adjustable mortgage rates are at 3.625% which is a decrease of .250%. With outstanding credit, borrowers can obtain these low jumbo mortgage rates with 0.7 to 1% origination fee. This week's economic data had mixed results on MBS prices (mortgage backed securities) as data continued to roll in. MBS prices affect mortgage rates which move in the opposite direction. While new home sales came in stronger, home prices continued to decline. Consumer sentiment increased and personal income rose at the same time that unemployment claims increased. With gas prices heading up, everyone will be watching to see what impact this is going to have on the already slow economic recovery.