How does having someone else on the title(on 1st home) affect me being able to buy alone? 30%equity and rent will cover mortgage/insurance/taxes

Asked by Kc, 20906 Sun Jan 1, 2012

I currently own a home with someone else. We will both be parting ways but want to keep the house for rental income. We've both agreed to wait until the market improves if we do end up selling. We've been in the home for 3 years and have 30% equity in the home. (last appraisal was almost a year ago when we did a refinance) How does having a home being rented affect my ability to buy another home? Going from the current rental rates on our street we estimate the overage will be $340-440 after taxes, insurance and mortgage payments. Will the bank only look at half the housing expenses and half the income when approving me? He would be renting and I would be moving to Maryland and hopefully buying a home there.(transferring job) I would also be looking at homes with a rental-able basement so how is that looked at during a mortgage approval? I have been told to multiply my income by 3 and add in down payment to figure out a range of where I might end up in. That number looks to be 215k

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Deborah Garv…, Mortgage Broker Or Lender, San Diego, CA
Mon Jan 2, 2012
Great question....actually great questionS!

Traditional underwriting guidelines allow for a rental credit of 75% to offset the mortgage, taxes and insurance of any rental property. For example, rent of $1000 would give you "income" of $750. If the total mortgage was $1000, underwriting would calculate a debt of $250. The lender may require an appraisal of the property to determine "fair market rent" (this is a lender specific issue, some would just require a lease agreement). Note: the use of a 25% vacancy factor for rental property is an industry standard. The suggestion below that lenders will use 80-90% is completely erroneous information.

Again, the above is an explanation of traditional underwriting guidelines; however, there are very little standards that are industry wide in today's market. Most lenders are now requiring a two year history of rental income (on tax returns) before allowing any use of rental income. However, some lenders may waive that requirement if you have 25% or more equity in the property (as you stated). Again, an appraisal may be required. My company would not allow me to use any rental income; however, I have seen comments from mortgage professionals that indicate they can still use the rental income.

I have not heard the 3 times income rule in a long time and find it more out dated and misleading than ever before. It MAY be useful for a consumer to try to determine what he/she would be comfortable with; however, the calculation would have no relevance to mortgage qualifications to assist with getting your financing approved.

Several issues in your comment would be addressed and questioned in the underwriting process:

1). Moving to Maryland? Transferring with your job? New job/company? Underwriting is going to be very focused on the stability of your income.

2). Separating and dividing the mortgage payment (off set by rents received). Underwriting is going to address this issue very conservatively. In fact, I would expect more lenders to "hit" your debt to income with the entire mortgage payment with no credit for rent. If you and your co-owner had a history of six or twelve months, I could see the underwriter being more lenient; however, at the onset they have to assume that you may need to cover the entire mortgage payment until the property is sold.

3). It is doubtful that the underwriter will allow any rent credit on a new purchase for much the same reasons listed above on your current residence. If the property is not a true multi-unit, no rental credit would be allowed in any case.

I am sorry to be so pessimistic about your financing options; however, I suggest you be far more conservative than the 3 times income "rule" (whoever made it up in the first place?). Your situation could be very dicey, very quickly if your co-owner did not pay the mortgage, the house doesn't rent, or the transfer goes awry. I am not trying to discourage you from your stated goals; however, it is important to be realistic about how underwriting may analyze your situation. I suggest you talk, at length, with a finance professional before making any final decisions. Obviously, if your income, savings and credit call support all of the payments for all of your goals my cautions are not necessary. One last thing: you will need to have six months reserves in savings (after buying the new property) for the rental property. Best of luck to you!
1 vote
Natalie Dean, Agent, ANNAPOLIS, MD
Wed Jan 4, 2012
Good Afternoon KC:
In speaking with a loan officer the first question they are going to ask is have you been receiving rental income for at least a year and have you filed this on your taxes? If your answer is yes to this questions then its time to get qualified so you can move on with your second purchase. If the answer is no then you will probably run into problems qualifying. Again speaking with a mortgage professional is your first line of defense. If you would like a recommendation for a good one please do not hesitate to contact me.

All the Best!
Natalie Dean
0 votes
Annette Levi…, , New York, NY
Tue Jan 3, 2012
Dee is correct that the industry formula is to take 75% of the rent minused from the PITI. Since your new position is in another area, the underwriter takes into account your new income (if it is a new company, they will need a copy of the contract or job offer). Only the legal usage of a house is taken into account so a rentable basement (in Maryland no basement is legal as an apartment) is not a consideration to the underwriter. If you have the income and credit you will be able to get a mortgage to purchase another home.
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Molly Carter, Agent, North Bethesda, MD
Sun Jan 1, 2012
I will be happy to direct you to a reliable lender who can answer all of your mortgage questions as law prohibits me from answering what is out of my my area of licensure.
Different lenders will require different ratios on your investment. Are you both on the Deed of Trust or Deed only?
How much do you trust this person to keep up with their end of the Deed of Trust if you are both on it? Can you afford it if they do not? Who will be claiming it on taxes and/or how that can be divied up would be best answered by a CPA and that is what the lender will also look at.
There are certain requirements for renting out basements as well- they must have legal bedrooms.
I will be happy to help you and provide you references for reliable experts.
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Piero Marinu…, Agent, Silver Spring, MD
Sun Jan 1, 2012
KC, having that second person on title will have little effect on your ability to buy or not. Your application for a mortgage will still look at your ability to pay for your current home plus your next one. I am pretty sure the lender will need to see your ability to handle your current mortgage and expenses on your own (with rental income).

The lender will look at about 80-90% of the rental income and all of the expenses on the current home, then your income & other expenses in your name to qualify you for the property you hope to buy.

Hopefully you'll get some answers from mortgage reps, as they will be your true experts on this question.

I'm a real estate agent in Silver Spring so if you need any help looking for that property or if you need the name of a good lender experienced with 2nd home purchases, please let me know.
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