Question with 1st home equity requirement if I am looking to buy a 2nd home as a primary resident

Asked by Ken, Los Angeles, CA Thu Jul 21, 2011

I recently got relocated to SFC, however, I purchased a house in LA about a year ago. With the housing market sliding down, it is a great time to buy vs renting in SFC. I have the downpayment ready, however, I heard that I must have to have 30% equity for my first house. When I purchase the first house, I put down about 28-30% down. Now my house has dropped to about $100K base on Zillow appraisal. Do I need to come up with an extra $100K to cover the first house in order for me to buy a 2nd home? The second home will become my primary home in SFC, but the LA home might either be my vacation home or rental property. My question is what can I do to not pay $100K to the first house equity; instead i can put majority of the fund into the 2nd home downpayment? Please advice.

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8
Matthew Goul…, Agent, San Francisco, CA
Fri Jul 22, 2011
Hi Ken,

I forgot to answer your additional question. the loan limit is sceduled to drop to $625,500 on October 1st 2011.

As a member of CAR and the NAR we are working very hard in Washington to stop this change, but time is running out.

Good luck
0 votes
Matthew Goul…, Agent, San Francisco, CA
Fri Jul 22, 2011
Hi Ken,

Firslty you should talk to a mortgage broker with your specific requirements, but I also note that you are using the Zillow appraisal value. This is not a good idea, I say this because Zillow or any automatic formula drivien system is fundamentally flawed (on my website we actually show the e-praisal and zillow value next to property and this can over 20% off, but in many case it is over 10% out of line. Your property may not have fallen by this much and I would suggest calling the Agent who represented you when buying and asking them for a quick CMA on the value.

For a mortgage referral I would ask you to call me and explain a little more, I could then point you in the right direction to one of several who I have great sucess with.

If you need an agent in SF who is used to working with Relocating clients from across a state to accross the world, give me a call. P.S. I relocated from the UK in 2002.

Matthew
Web Reference:  http://matthewgoulden.com
0 votes
Shane Milne, Mortgage Broker Or Lender, South Jordan, UT
Fri Jul 22, 2011
You are welcome. The last day for the limits as they currently are is September 30th. FHA requires you have a "credit approval", meaning an underwriter reviewing your loan (with a property address), however for Fannie & Freddie conforming loans lenders are requiring them to close by that time - some lenders even sooner than that, and then you'll also have to deal with other various milestones such as "last day to submit", "last day to lock", "last day to draw docs"... for the old conforming loan limits.

FHA's guidance on the matter: http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/fi…
0 votes
Ken, Home Buyer, Los Angeles, CA
Fri Jul 22, 2011
Thanks for the info. I think we don't need to really live on the rental income to pay the mortgage, but it would be stretching. We should be able to afford a medium price condo.

I want to find out about the limitation of the jumbo loan. I heard that it will drop to $619K, do you know when will it start? please advice.
0 votes
Rudi Hofmann, Mortgage Broker Or Lender, El Segundo, CA
Fri Jul 22, 2011
Ken,

The 30% is only required if you want 75% of the rental Income (Form 1007) to help you qualify with the two house payments. Also, be sure you make your loan application for a primary residence. Not a 2nd home.

Happy funding, Rudi
Web Reference:  http://www.umboc.com
0 votes
David Tapper, Agent, Burlingame, CA
Thu Jul 21, 2011
Hi Ken, If you would like a referral to a trusted, local mortgage professional, feel free to ask.

Welcome to S.F.

Tap
0 votes
Shane Milne, Mortgage Broker Or Lender, South Jordan, UT
Thu Jul 21, 2011
When you are vacating your primary residence and converting it to a rental property or as a 2nd home, there can be some additional requirements when it comes to qualifying. There is no standard guideline which says you must have a certain amount of equity in the home you are vacating... but if you want to use rental income from the home you are vacating in order to help you qualify, then there can be.

If the new mortgage you are getting is FHA financing, if you can qualify for both your new and existing mortgage payments without the use of rental income, then there are no additional restrictions. However if you need to use rental income from the home you are vacating then you'll either need to prove you have 25% equity OR be relocating to a new area for employment (such as you are being). In that situation, then 85% of the amount you are renting it for can be used to offset it's housing payment with the end result being you can qualify for more. You need a rental contract spanning at least the first year of the mortgage and a copy of the 1st months cancelled rent check and/or security deposit. There are no "reserve" requirements for FHA financing (meaning money leftover in the bank after closing, although I do not advise being flat broke immediately after you buy a home), and the down payment can be as little as 3.5%.

With conforming financing (the most popular type of conventional financing), if you can qualify for the new and existing mortgage payments without rental income from the home you are vacating, then no issue with the amount of equity your old home has. If you do need to use rental income to help qualify, then there is a 30% equity requirement in the home - relocating for employment is not sufficient in itself. Conforming loans have reserve requirements, it can be as little as 2 months of the new monthly payment on the home, but it can also be up to 6 months months reserves for the your retained and new mortgage (depending on how much you are putting down, as well as if your loan is being approved through Fannie Mae's or Freddie Mac's automated underwriting system).

Please let me know if you have further questions.
0 votes
Douglas Fuji…, Mortgage Broker Or Lender, Encinitas, CA
Thu Jul 21, 2011
Ken,
The 30% equity in your current home is only a requirement when you are converting that home to an investment property AND you want to use future rental income to offset the mortgage payment. If you can qualify for BOTH mortgages without the rental income, then the equity position in your current home is largely irrelevant. Call me with any questions.

Good Luck!
Doug
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