If both mortgages are covered between my income and rental income am I likely/unlikely to get approved?

Asked by Ed, Anchorage, AK Fri Feb 20, 2009

Currently, I am looking to purchase a duplex (to live in/rent other side). In a few years I will have to leave the state. I'd like to leave the duplex rent both sides out and purchase another house in another state (where I move). I have good credit. I am just worried that wherever I move I may be looked at as a risk and not get the financing. I know that no one can really answer this question as a fact but people do this stuff and I want to see how likely I am.

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Other/Just L…, , Fleming Fitch Grant, Holly Hill, FL
Fri Feb 20, 2009
Lending answer:

At present, Fannie Mae requires that prospective homebuyers who intend to convert their existing primary residence into a rental property must prove 30% equity in the current primary residence if the future rental income will be used for qualifying. If the current primary residence does not have 30% equity, then no rental income may be used in qualifying for the new mortgage AND the borrower must prove 6 month's worth of PITI (Principal, Interest, Taxes and Insurance) in reserve for the BOTH mortgages.

As always, only 75% of the rental income may be used for income qualifying.

In plain language, what this means is that:

1.) When you move to another state and rent out both sides of the duplex, you may only use 75% of the gross rental income towards qualifying towards the new mortgage. For example, if both sides of the duplex generate a combined rental income of $1,000 per month, you may only use $750 per month to "cover" the mortgage payment with property taxes and homeowner's insurace factored in.

2.) If your duplex has less than 30% equity when you decide to buy a new primary residence, you can't use ANY of the rental income. You would have to prove enough income to cover both the old mortgage payment (with property taxes and homeowner's insurance factored in) PLUS the new mortgage payment with property taxes and insurance factored in.

3.) If Number 2 above is true, you'd also have to have 6 month's worth of BOTH mortgage payments with property taxes and homeowner's insurance factored in in proven reserves after downpayment and closing costs for the new house are taken out. This would be in addition to any other reserves that might be required to qualify for the new mortgage.

4.) If number 2 is not true (ie you have 30% equity in the duplex when you decide to buy another home), you'd have to supply a signed lease AND either the first moth's rent payment or security deposit for both sides of the duplex (such as a copy of the tenants' checks and proof of deposit).

5.) The 30% equity in the duplex can be proven by an appraisal (ordered by the lender) or a Broker Price Opinion supplied by a Realtor.

FHA: If you decide to buy the new home (after you move out of state) with an FHA Inured mortgage, the same rules above will also apply... but there are two exceptions which might be helpful in your situation:

RELOCATION Exception: If you are relocating to a new employer (or being relocated by your current employer), you won't have to show proof of deposit of first moth's rent and/or security deposit by the tenants. A signed lease after the loan on the new home is closed is sufficient.

EQUITY Exception: If the appraisal on your duplex is less than 6 months old when you apply for an FHA insured mortgage for the new home, you can use that as proof of 30% equity OR you can show you have paid down the mortgage on the duplex by at least 30%.

NOTE: You can use an FHA insured loan to buy the duplex AND qualify for a second FHA insured mortgage to buy the new home out of state under FHA's general RELOCATION exception to the normal "One FHA loan at a time" rule. In other words, you could buy the duplex with an FHA insured loan, get a job out of state, and then get another FHA loan to buy the new home without being required to sell, refinance, or pay off the FHA insured loan on the duplex.

FURTHER NOTE: Consider an FHA insured loan for both transactions. FHA's low down payment and minimal reserve requirements could help you accomplish your goals - especially if you don't have the cash reserve requirements demanded by a conventional loan underwritten to Fannie Mae guidelines.

MOST IMPORTANT: Since your equity position in the duplex will be a huge factor in determining your total qualifying income, it is very important that you have a Realtor acting as your Buyer's Agent to properly advise you on the potential increase or decrease in value of the duplex over the time you expect to occupy it as your primary residence. That 30% equity requirement for both Conventional and FHA insured mortgages will determine if the rental income may be used.

Further, if the lender for the new home requires an appraisal of the duplex, the appraiser will be required to research typical rental income for proprties like your duplex. You'll need a buyer's agent to make sure your costs of ownership don't exceed what the market will bear (this is not only bad financially, but can also cause problems in using rental income to qualify for the new home even with 30% equity in the duplex).

You'v asked a smart question. Prior Planning Prevents Poor Performance.

Below are links to Fannie Mae's underwriting guidelines for Conversion of Principal Residence to Investment and FHA's rule for the same. Good luck!

Fannie: https://www.efanniemae.com/sf/guides/ssg/annltrs/pdf/2008/0816.pdf
FHA: http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/fi…
2 votes
Lisa Fraser, Agent, Anchorage, AK
Mon Feb 23, 2009

Just to expound on Luke's response. Properties within the Municipality of Anchorage would not qualify for a USDA Rural loan. For more information on loan programs and interest rate reductions I would check out the Alaska Housing Finance Corporation website at http://www.ahfc.state.ak.us. But, again, I would go and speak with a local lender and find out exactly what you would qualify for and any programs that may be available for you. I stress, a local lender. As you know, things here operate a bit differently than they do Outside and not all shop-for-the-cheapest-rates lenders will know about all programs available.

Lisa M. Fraser
Web Reference:  http://www.ahfc.state.ak.us
1 vote
Other/Just L…, , Fleming Fitch Grant, Holly Hill, FL
Sun Feb 22, 2009
Excellent, salient point from Lisa.

I usually recommend seeking a Pre-Approval prior to shopping for a home (a Pre-Approval means submitting all of your income, asset, and other documentation to an underwirter for a credit decision), but in your case I suggest sitting down with a Realtor first. By purchasing a duplex, you will become a First Time Homebuyer AND a Landlord at the same time.

A Realtor acting as your Buyer's Agent can advise you on the availability of good tenants for the other side of your duplex, advise you on current market rents for your prospective rental unit, and advise you on Alaska laws regarding landlords and tenants. All three items would be important knowledge to have in developing your real estate investment strategy. Such knowledge would also be important in deciding whether to apply for a VA loan, FHA loan, or Conventional mortgage for the duplex as well as helping you prepare to be a financially sound landlord.

At present, I'd recommend leaning towards an FHA insured loan for the purchase of your duplex if you anticipate being reassigned to another base or leaving the military. As Lisa points out, you'd have to sell or refinance the duplex if it is purchased with VA guaranteed loan and you decide to purchase your next home with another VA guaranteed loan.

Additonally, the VA funding fee increases with subsequent uses... which means your closing costs would increase on the second use of your VA benefit. The present buyer's market, in which many sellers are willing to contribute to a buyer's closing costs, may not be around when it comes time to buy your next home.

There is one more important question to ask your lender which I am unfortunately unable to answer for you: Can you use your VA loan guarantee benefit to buy your next home with an open FHA insured mortgage (on your duplex)?

I can't fnd anything in FHA's Underwriting Handbook or subsequent Mortgagee Letters which says you can't have a VA loan guarantee AND an FHA insured mortgage at the same time... which means that when it comes time to buy your next home with a VA Loan guarantee (and you purchased the duplex with an FHA insured mortgage), the lender for your next home might have to call the VA for a ruling. It's unlikely to pose a problem, and it is a minor point, but being a rare situation, it might cause a delay while your lender figures it out. So ask your lender up front when applying for the loan for yourduplex.

One last answer in anticipation of an unasked question that might arise:

Q: How long must one occupy the duplex to fulfill FHA's Owner Occupany requirement?
A: FHA requires home buyers to occupy their home within 60 days of closing and for at least 12 months thereafter to satisfy the Owner Occupancy requirement.

The above just in case you plans change and you must move earlier than three years.

"Thank you so much for taking the time to answer this question in length. "
Response: Isn't Trulia great?
1 vote
Lisa Fraser, Agent, Anchorage, AK
Sat Feb 21, 2009
I noticed you said you could use your VA loan. Just take into consideration that you can only use 1 VA loan at a time. If you use a VA loan on this duplex you cannnot use it on your next property unless this one is paid off or refinanced into another type of loan. You can only have one outstanding VA loan at a time.

Lisa M. Fraser
Web Reference:  http://www.lisamfraser.com
1 vote
Dp2, , Virginia
Sat Feb 21, 2009
One way to do this--especially if you're thinking about purchasing another duplex when you move--is to approach a commercial lender with these deals, and ask to do the refinance and new purchase as a blanket mortgage. The commercial lender will look at the income from the properties first, and look at your income (and credit) second.
1 vote
Other/Just L…, , Fleming Fitch Grant, Holly Hill, FL
Fri Feb 20, 2009
Ed, one further note (Trulia limits answers to 5,000 characters; I ran out of room):

Two other important reasons to consider an FHA insured loan on he duplex:

1.) FHA insured mortgage notes are assumable. Interest rates at present are Eisenhower low. In the future, the ability to sell your duplex with a low rate assumable note may be a critical factor. Ask your Realtor how this might assist you in the long term.

2.) FHA has generous allowances for tenants who purchase the home the have rented. Assuming that the lease is set up properly, it is possible that a portion of the tenants' rent can count towards his/her down payment should he/she wish to buy the duplex. There are certain FHA requirements to set up at the beginning of the lease. The important ones are: if a portion of a tenant's rent is to be used in the towards the tenant's down payment requirement for FHA, the rent must (a) be above the fair market rent for a similar dwelling and (b) the amount to be used to towards the tenant's down payment (in excess of fair market rent) must be spelled out in the lease.

The nice thing about the rent credit towards down payment is that YOU don't have to porvide that money from yur rental income... FHA considers the amount paid above fair market rental to be essentially an advance down payment to the seller.

With a little careful planning to could have a potential powerful exit strategy (assumable low rate note and buyer's down payment credit) in place on the duplex.
1 vote
Lisa Fraser, Agent, Anchorage, AK
Fri Feb 20, 2009

I would say that as long as you maintain your good credit and can show that you have received steady rental income from your duplex that it would not be an issue. A number of people own investment properties as well as homes that they live in. If you are currently looking, I would suggest that you speak with a lender about this and they would be able to give you a more definitive answer. Most any Realtor is going to want you to be pre-qualified before they show you properties so this would be an important first step anyway.

Lisa M. Fraser
Web Reference:  http://www.lisamfraser.com
1 vote
Luke Allison, , Asheville, NC
Mon Feb 23, 2009

While you do have some options to make a well-informed plan for not only your current purchase but also your future purchase, please keep in mind a few things:

1) Both VA and USDA Rural Loans are both eligible for 100% financing but both require the home to be owner-occupied
2) You can only have 1 VA loan at a time.
3) If you buy your home as owner-occupied and then move, it then becomes investment property. Your best bet would be to refi out of the VA loan into a conventional loan and then buy your new home with a VA.
4) You would have to have at least 20% equity in your home to refi as investment since those loans are maxed at 80% Loan-To-Value.

And probably the most important...
5) If you must use what rental income you are receiving on the home you are buying, the rental income MUST be disclosed on your tax return. If you don't claim the income, it will not be used to help qualify you.

Here is a rough calculation of how rental income is viewed...

Mortgage Payment $2,000
Rental Income $1,000

Take the rental income and multiply by 75% ($750.00). Subtract that number from the mortgage payment.
Net result is $1,250

That negative $1,250 does NOT get counted as a debt but will instead be deducted from your gross monthly income to arrive at the income number that will be used to determine your new debt ratios.

That at least makes it easier to qualify on your new home.
I know it all sounds complicated but it is relatively easy if you structure it right. Please call me if you have any questions.
Luke Allison
Flagstar Bank

Apply Online: flagstarloans.com/lallison
0 votes
Ed, Home Buyer, Anchorage, AK
Sun Feb 22, 2009
Thanks again....

I am looking to put zero down on this first purchase to hang on to any savings for problems that could arise.
Aside from the VA loan are there still other options on the table for zero down. I remember back in a '06 when I was looking for homes I had a few options.
0 votes
Ed, Home Buyer, Anchorage, AK
Fri Feb 20, 2009
Thank you so much for taking the time to answer this question in length.

I'm in the military, I've been in AK for 5 years now and I am waiting to find out if I will be extended 3 more years. If I am I would like to buy so that my money isn't being wasted any longer on rent (also since housing prices have come down).

My goal is to get into a duplex to start investing in real estate. I figure this is the best and safest way for me. I will also reduce my monthly mortgage payment while i'm living there, allowing me to drop the rest on principal.

I would like to buy a house everywhere I go to build my net worth. Thanks again for the answers I will save these. On another note I can also use my VA loan. I will consult the lender on the best strategy. More comments welcome.
0 votes
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