Home Buying in Palo Alto>Question Details

Chloe, Home Buyer in Palo Alto, CA

Contingency for the mortgage?

Asked by Chloe, Palo Alto, CA Fri Nov 12, 2010

During the process of pre-approval, there is a contingency regarding renting out the current house before closing the loan. We are self-employed and a family of four. Is that a new requirment for all the lenders nowadays?

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Stilla Raissi’s answer
Hi Chole,

That is true, you need to rent your house ( rental agreement+deposit check shows in your account)

or you should qualify for both mortgae.

Let me know if you have any other question


Stilla Raissi

Los Gatos
408-316-8899
0 votes Thank Flag Link Fri Nov 12, 2010
I had the same situation pop up a buyer nearly two years ago. Buyer was single, not self employed, has stable income and excellent credit. Bank required a signed one year lease agreement with a bank verified deposit and first month's rent for the current property.

It created a challenge, however, we were able to work it out as the replacement home seller was in a financial situation and needed to rent, so the seller rented the buyer's property for a year. The most challenging aspect was the moving date.
Web Reference: http://terrivellios.com
0 votes Thank Flag Link Fri Nov 12, 2010
Chloe,

Some good responses below and I agree with Robin on this particular question. The concern is the equity position on the current home as to whether or not they will allow rental income to offset the debt on the current home. Expect lenders to confirm a 30% equity position to allow rental income to be used from the first home at which time they will need to see the rental agreement in hand.

Prior to the current lender qualifiers, lenders would often use a rent survey to give an approximation of rent in the area specific to your home type (bedrooms/baths/square footage). Given that, they would use 75% of that rent, allowing 25% to vacancy and maintenance in their calculations against any debt. This no longer applies.

So that you are aware for future home purchases, the new guideline is that they will look at your tax returns (Schedule E) for "net" income from your rental. What most landlords have done for years was to deduct everything - including that kitchen sink, so as to offset any rental income and subsquently taxes. This makes tremendous financial sense and is something we all do - looking for all the deductions we can against our income to pay the least amount of taxes possible. However, with the new rental income calculations used, a "loss" on a rental property would take away from any Gross income (from a W-2 borrower) or Net Schedule C income for a self-employed borrower. I have already seen many borrowers this year that would have qualified by virtue of their income, no longer meet that criteria when rental income losses were applied.

As several have pointed out, as long as you qualify for both homes, there is no issue. If you have any further questions, please don't hesitate to call or email.
0 votes Thank Flag Link Fri Nov 12, 2010
Chloe
The answer is, It depends on your income and expenses.
If your income was so high you could qualify for both mortgages - the current mortgage and the new mortgage - without any additional income from the property you will rent then you would not need to rent your house.
If your income is such that you need the addtional income from the rental of your current house then yes every lender will require a rental agreement.
For example:
If your income is $25,000 a month and your payment on both mortgages was say $6,000 a month; you would probably not need to provide rental contract because $6000/$25000 is approx. 25% debt to income ratio.
However if your two mortgages are $10,000 a month then debt to income ratio would be high at $10,000/$25,000 at 40% so you would need to document rental income to bring debt to income ratio down.
So if house could rent for $3,000 then your monthly income would increase to $28,000 so ratio would be $10,000/$28,000 or about 35%.
Hope this makes sense.
0 votes Thank Flag Link Fri Nov 12, 2010
Chloe, being self-employed is not an issue if you show sufficient income on your tax returns. You are not really explaining this situation well, but here are the facts. If you can carry both loans along with any other debt, there is not a problem. Of course this means carry it based on the income that you show on your returns. I had a doctor who owned a home free and clear that couldn't sell, but with the $800,000 a year income he showed, he was able to cover everything, and there is no issue.
From what you are saying, I am making the assumption that this is not the case. The other issue when turning a primary residence into a rental property is how much equity you have. Even if you can rent it out for enough to cover your mortgage payments, if you don't have at least 25% equity, you cannot count the rental income. If you have equity, you will need to have a signed lease, and evidence of receiving the security deposit, in order to exclude it from debt.
0 votes Thank Flag Link Fri Nov 12, 2010
Yes Chloe, all the lenders that I've dealt with have the same requirement for all buyers, whether self employed or otherwise.
0 votes Thank Flag Link Fri Nov 12, 2010
Chloe,

In the free lending days of 2005 and 2006, this would not matter. It was technically a requirement, but it was not being enforced by lenders.

Your being self employed has nothing to do this requirement. The lender is looking to not include both mortgages against you, and would need a rental agreement, a copy of a cancelled check for the security deposit and would like to see that you have a satisfactory history of renting out homes.

By doing this, you are only qualfying with the new mortgage and would meet the standard.

I am happy to review this in more detail with you if you would like.

Best,

Eric Nelson
Sr. Mortgage Planner
DRE 01258488
SVC Funding
408-268-2442
0 votes Thank Flag Link Fri Nov 12, 2010
Chloe,
You need to prove to the lender that you can pay both loans. If you need rental income to afford both loans most lenders will want you to prove that it will be coming in. In the past, you only had to have a rental survey, which showed how much the home would rent for if you rented it out, not that you had rented it out. The rules are stricter for self employed families, but in this instance it is the same for wage owners as well in my experience.
Marcy Moyer
DRE 0119114
Web Reference: http://www.marcymoyer.com
0 votes Thank Flag Link Fri Nov 12, 2010
Whether self employeed or not, if you currently own a property and are buying another property, the mortgage company will want to see the originsl house leased out with proof of such. Being self employeed adds other factors, but the renting out is common for any buyer.

Please see my blog for tips and advice on getting s mortgage
0 votes Thank Flag Link Fri Nov 12, 2010
Being self employeed makes the loan application process more difficult than if you have a normal job that generates w2's. So it appears that the lenders may be more conservative when dealing with self employed . Sounds like the lender does not beleive you can afford both homes.

Keith Manson
First Weber Group
Certified Distressed Property Expert
Metro Milwaukee
http://www.milwaukeebailout.com
0 votes Thank Flag Link Fri Nov 12, 2010
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