Home Buying in California>Question Details

Nully, Other/Just Looking in California

We currently own a condo that is valued for less than we owe on our mortgage. We have no problem making our

Asked by Nully, California Mon Jun 30, 2008

payments, but would truly love to buy an actual house (with a yard, where we can raise children, etc). With prices so low right now, we are considering renting out our condo and purchasing a 2nd home to live in. We have already been pre-approved for this second loan amount, so we know what we can afford. It just sounds very risky. Given the current market conditions, would anyone recommend this, or should we wait until the market flips?

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If you can rent the condo you will receive tax benefits it depends on many factors involved. Suggest placing all in a formula spread sheet review the pros and cons.
http://www.lynn911.com
0 votes Thank Flag Link Mon Jun 30, 2008
This is Nully, the original person who asked the question. Thank you all for your insightful answers. I think our problem is that we CANNOT get enough rent for our current condo to cover its mortgage payments. If we take 75% of the rent we expect to get, it will be just over half of our mortgage plus taxes. Meaning we'll have to cover the other half, in addition to our new mortgage. This should have been taken into account when we got pre-approved.
0 votes Thank Flag Link Mon Jun 30, 2008
A couple of thoughts from a lending perspective:

1.) Only 75% of your gross rental income can be used towards qualifying income. This means if you charge $1000 a month for rent, with an $800 a month mortgage payment (including taxes, insurance, and HOA fees), you will have a negative cash flow for qualifying purposes of $1000x75%-$800= (-$50.00). This effectively reduces your qualifying income.

2.) You must have a fully executed lease AND cancelled check from the tenant for security deposit or 1st month's rent in hand to use any of the rental income to offset your mortgage (for qualifying purposes)

3.) Fannie Mae and Freddie Mac have issued guideline chnages that significantly tighten the qualifying standards for income producing properties especially when converting a primary residence to a rental. If you cannot prove that you have at least 30% equity in your current home (using a BPO from your Realtor or an AVM from your lender), NONE of the rental income may be used to offset the mortgage expense of your current residence for income qualifying. This means you have to document enough income to pay both mortgages plus all other debts.

4.) Reserves: You must prove 6 months' worth of mortgage payment, taxes, insurance, and HOA fees in a bank account for BOTH properties if you cannot prove 30% equity in the residence you are converting to a rental property. If the equity is there, you could get away with just 2 months' reserves for both properties if Fannie's automated underwriting software says so.

The changes above apply to loan applications dated AUgust 1, 2008 or later. Some lenders may apply them in advance of that date.

If you are unable to meet the new guidelines, your loan is inelgible for delivery to Fannie Mae. I've heard that Freddie Mac will soon (if not already) adopt the same changes. Fannie and Freddie are really hitting investment property owners hard on qualifying.

Since you already have a Pre-Approval, you must make your decision very soon. You'll have precious little time to locate a property, negotiate a sale, and submit your application prior to August 1st.
0 votes Thank Flag Link Mon Jun 30, 2008
This is a complicated situation and you need to look at your overall financial situation. You should sit down with your financial planner to see if everything works out. If you get the go ahead, this is a great time to buy as prices are low and rates are still relatively low. As far as your condo goes, I would rent it out as long as you can cover your mortgage payment, taxes, and insurance. Rents are generally going up right now, so you would most likely be fine there. When the market picks up you could sell outright or do a 1031 exchange into a bigger investment property.
0 votes Thank Flag Link Mon Jun 30, 2008
Dear Nully,

Renting out your home and purchasing now is a great idea.... BUT first research the demand in the rental market for your current property. Ensure that you can rent it quickly for an amount that makes sense for you financially (i.e. ideally enough to cover mortgage, taxes, insurance and a little extra for reserves). The agent you use to purchase your new property should be able to assist you in procuring a tenant for your current property... be sure to have a credit report and check references, especially prior landlords/property managers.

If the numbers and data looks to be in your favor, then go for it. It is a great time to buy and move up into a property that will provide you with a better quality of life.

Best of luck!!
Tara
0 votes Thank Flag Link Mon Jun 30, 2008
Nully -

Tough question. A couple of things to think about or check on. That the rent you can charge for the condo actually covers the mortgage and maintenance (5-10% overhead). Also, is that mortgage PITI (principal, interest, taxes, insurance) or just interest only. Interest only is riskier because I assume your loan will adjust and you have to compare market loss vs interest adjustment. You also have to decide whether the rent will cover PITI when the mortgage adjust or that the market will have increased and you can sell before it is adjusts. There are two ways to build value in your home, pay principal to build equity or wait for the market to build equity by prices going up. The market is hard to predict.

From a market standpoint you want to size up, buy up in the down market. Resets your appreciation base and as you mention, allows you to buy the home with the yard that previously was not affordable. If your lender has reviewed your finances and loan options with you and believes it can be done, it may very well be a worthy risk.

To me a great deal will depend on the current mortgage being covered by rent and allowing you to build equity with principal payments with the rent and the new mortgage allowing principal to be paid as well. Try to avoid mortgages adjusting at the same time. Preferably, have fixed rate on the new loan.

The key is to be working with a reputable lender and agent to help guide you into your next step.

Good luck,
CJ
Web Reference: http://www.TalkToCJ.com
0 votes Thank Flag Link Mon Jun 30, 2008
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