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.