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.
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!!
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.