Buying a second home: question on the guidelines

Asked by Bellaniri, Bellevue, WA Fri Feb 11, 2011

We currently own a home in Redmond & are interested in purchasing a second home that would become our primary residence. Is it true that if your income can't support buying a second home, you need to rent your first home plus have 30% equity in it? I've heard different versions from different people. Some say you just need to rent you current home for about 6 months to a year, then you can buy another home. Any information would be very helpful. Thank yo.

Help the community by answering this question:

+ web reference
Web reference:

Answers

12
, ,
Fri Feb 11, 2011
Bellaniri, I noted that so far no lenders have chimed in so I thought I'd give you some lending info - whether or not the home in Bellevue is considered your "primary" or "secondary" residence is really determined by the facts at the time you close escrow.

Yes, it sounds like you will need to qualify to carry both house payments - which makes sense because you will in fact have two house payments.

Whether you can or cannot qualify with both is pretty easy to determine. You just need to apply with a lender, pay about $17 for the credit report and get yourself pre-approved.

if you can't qualify with both house payments then you have the choice of either a)selling your current, or b)renting it out. Even if you rent it out you may still have trouble qualifying as lenders have gotten very leery of borrowers who are "buying and bailing." That's how bad it's gotten - there is industry slang for the now common occurrence of borrowers purchasing a new home and then never making a payment on the old home and letting it go into foreclosure.

That certainly doesn't sound like your intent but that's the lending environment you face.

One thing you said that frustrates me on your behalf - you should NOT be hearing different versions from different people. The issue of qualifying with both homes is very black and white in Fannie Mae and Freddie Mac's guidelines. My guess is that at least one of the lenders to whom you have spoken just don't know what they are talking about.

The 30% equity rule is the new one place on people like yourself that are "converting" their current residence to a rental - IF you have at least 30% equity (as evidenced by an appraisal) then the rental income you collect can be used to help you qualify. If you do NOT have 30% equity then the rental income won't count - even if you collect it.

We get a lot of CA homeowners purchasing 2nd homes in WA so the topic comes up frequently. If you have additional questions don't hesitate to ask.
1 vote
Janice roth, Agent, Bellevue, WA
Thu Sep 13, 2012
Different Lenders and underwriters have different criteria. That is the reason you are getting different answers. We had a client get a legitimate lease signed on their existing home with our assistance in screening the potential tenants. The signed lease was given to the lender and 75% of that income was used, which helped their ratios. They could now buy a second home at a much higher price than your example and information above. Gary Roth 206 714-8107
0 votes
, ,
Fri Apr 29, 2011
Nati-

Give me a call. We are a bank and I do plenty of loans in Florida. I have seen this situation before and it can be worked through.
0 votes
Nati V, Home Buyer, West Palm Beach, FL
Fri Apr 29, 2011
Bellaniri, I came across this blog in search for an answer to my dilemma, similar to yours. Since my 1st home is 53 miles away from my job location, I have decided to relocate and signed a rent-to-own lease on my 1st home. I would like to purchase a 2nd home in the city I now work and reside in; however, I am finding it etremely difficult to find a lender willing to finance me. Like all the suggestions provided, I have 30% equity, a year lease implace for 4 months now, a rental income of more than 75% the monthly mortgage payment, and a middle credit score of 720. Now I am being told that I have to show minimum 2 years rental history in order for it to qualify as a rental. Is there any away around this??

Please help...
0 votes
The Home Loan…, , Everett, WA
Sat Feb 12, 2011
Yes, it is true that you need 30% equity in your "departure residence", i.e. the home you're leaving, in order to be able to count the rental income to offset the monthly payment on that home, if you're going to use conventional financing on your new home. 25% equity to use FHA financing on your new home.

Additionally, lenders have tightened up even more in recent weeks, and you'll need to provide a one year least on the home you're departing, and be able to document that a security deposit has been paid to you by your new tenant, and that the security deposit has actually made it into your bank account.
0 votes
, ,
Sat Feb 12, 2011
Bellaniri,

Good question, you shoudn't be getting different versions regarding the answer to this question; conventional (Fannie Mae & Freddie Mac) guidelines are very clear and don't vary from lender to lender.

Here is a full explanation to the answer to this question: http://www.luettmortgagegroup.com/2009/01/move-up-homebuyers…

Regards,
Andrew
0 votes
Jirius Isaac, Agent, Kenmore, WA
Fri Feb 11, 2011
Bellaniri, Michael is right about pretty mush everything he said. If you buy the new home with a conventional loan, you need 30% equity in the home you are turning into a rental. If you are buying the new home with an FHA loan, however, you only need 25% equity in that home. If you currently do not have that much equity, you can always pay the principle down to the point where you do. You do not need to rent out the house to use the income from it at 75% until just before you close on the new house.

I, like Michael, am concerned that you are hearing different stories. Everything is black & white except for maybe the debt to income ratio because specific lenders have somewhat different tolerances with those numbers. It is important if you go this route that you use a loan originator that knows which bank has better tolerances so you can go with the easiest one if it makes a difference. Believe me when I say that there are a lot of people in these fields that do not know their business very well.I have 2 listings in Redmond right now & one of them closed on Wednesday in 3 weeks after the buyers lender could not get it done at all. I sent the buyer to another loan officer at Metropolitan Mortgage where I work & it was a snap because we knew what we were doing.

I am a loan originator & a real estate agent & would be happy to help you with either or both anytime. Feel free to give me a call on my cell at 206-841-9976. Good luck to you whatever you decide to do.
Web Reference:  http://www.metromgi.com
0 votes
, ,
Fri Feb 11, 2011
Mr. Mullin gave an excellent answer and I completely agree. It is black and white as far as occupancy goes and anyone telling you anything else is either misleading or doesn't have a clue if your intent is to make it your second home.

I do have another thought. First, do you own any other investment properties? If you have two years worth of landlord experience, you can buy the new place as an investment property and the new rent payment can possibly offset the new debt. If you can't find a renter at time of closing, you might be able to use rent comparables (the estimated monthly rent that your new place might generate as determined by an appraiser). The rate you will get will be higher but if you see a place that you love and you can see yourself renting it for a while, this could be a way that you can get this done.

Please let me know if you have any questions.
0 votes
Bill Eckler, Agent, Venice, FL
Fri Feb 11, 2011
Bellaniri,

Keeping this real, if your income can't support a second home, why take that course. Shouldn't you be concerned about the financial risks you would be taking.....after all, look at the thousands & thousands of people already facing short sale, foreclosure, or bankruptcy situations.

Haven't we learned anything?
0 votes
Dan Tabit, Agent, Issaquah, WA
Fri Feb 11, 2011
Bellaniri,
I checked some guidelines and found this. You will need a fully signed lease agreement for your current home. The new lender will only apply 75% of the rental income to your income to qualify for the new purchase. You'll need to have reserves of at least 2 months rent in your account.
Your first step should be to meet with a local lender to review your total file. As I lender I've done this with clients on multiple occasions to make sure their credit, income, reserves and expectation are in line with what is available for financing.
Rates are ticking up, so I would encourage you to take this step as soon as possible to know your options. Let me know if I can help.
0 votes
Chris Loelig…, Agent, Redmond, WA
Fri Feb 11, 2011
Certainly start with a lender. They can tell you all of the issues around this. Another item to bring up with your lender is whether they will consider the rents you receive to be income or not. Typically they do not unless you have owned the investment property for a year or two. It's convoluted! Talk to your favorite lender.

Chris
0 votes
Tonya Brobeck, , Everett, WA
Fri Feb 11, 2011
I've heard that too. Your best bet is to talk to a lender. Rachel Hawthorne with Wells Fargo does a great job for my clients 425-466-9416
0 votes
Search Advice
Search
Ask our community a question

Email me when…

Learn more