How does a person know the approx $$ they can spend on a second house when the first is rented out. Is there a formula?

Asked by Aynwat, 98274 Wed Jan 12, 2011

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Wed Jan 12, 2011
Your best bet is to get in touch with a loan officer and become opre approved for whatever hypothetical scenario ..

are you looking at buying a true " second" home ( aka vacation home )..or are you planning to move from present home , rent it and then purchase a new home to live in as a primary residence ?

or have you already moved out of your primary residence , rented it and are now looking for a new place to buy to move into ?
1 vote
Justin Ruzic…, Agent, Greenville, SC
Wed Jan 12, 2011
You can spend as much as a bank gives you. But you should only spend the amount of money you are comfortable risking? I help dozens of properties owners who purchase homes for $60K-$80K, in terms of investments you have to put down 20-30% of the purchase price of the home, so in my customers cases they are putting down $15K-$20K, and they have mortgages on $50K -$67K, with a monthly cost of $500-700 depending on taxes and what the end of the scale the mortgage is on. They are renting the homes for $800-$900 so in most cases they are making $200 profit every month. BUT the months the property is vacant they are spending $500 a month, or the month the tenant stiffs them they are spending $500 month. The $500 a month they are spending is no a stress to them. They have it in the bank.
I think your question also might be what is the formula for a lender to approve a loan for you. Well your lender will not consider your rental income you "will" receive on the property because that is all theory, until it is rented. Then they wont even consider it as income until you have it rented for 24 months or more, at which point they take 75% of the rent an consider it income. The formula the lender will use is can you carry both mortgages without it being rented out? If not, you are not likely to get a second home. Best of luck to you in your real estate endeavors.

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1 vote
Nate Scott, Agent, Anacortes, WA
Thu Apr 21, 2011

The current home that is turned into a rental property must have at least 30% equity in it to be able to count the rents as income. If it does, then the buyer is able to count 75% of the rental income. If there is not 30% equity then they cannot count the rents and have to qualify for the whole payment and the new payment with just their income from their job.

Good credit and assets, sizable down payment really plays into how much of a debt to income ratio a person can get approved with. The normal is 45% or gross income minus all debts on credit Auto loans/credit cards), mortgage payment including (piti) and the old mortgage if applicable.

If someone made 5000.00 a month he would be able to use (45%)$2250.00 for all monthly payments listed above.
Some times with strong assets and credit scores they can go to 50% debt to income.

Hope this helps!

Good luck,

0 votes
Joseph Mason, Agent, Bellingham, WA
Wed Jan 12, 2011
There are several formulas to consider. The first would be your 'debt-to-income' ratio, the second would be your ratio of rent vs mortgage on the 'rental property'. Typically lenders only allow .75% of your rental income to applied into your DTI, allowing for a vacancy %.

Here to help.
0 votes
Dan Tabit, Agent, Issaquah, WA
Wed Jan 12, 2011
For your specifics, you'll need to talk to a local lender who can look at your overall financial situation. In general, a lender may consider up to 75% of your rent as income when calculating your debt ratio, provided you have a signed lease agreement and can document a history of rent coming into your account.
If you add this income to your other income, a lender may allow 45% of your gross income to go toward a new mortgage. There are exceptions to this, depending on your overall situation and the loan program.
0 votes
edfinlan, Agent, Burlington, WA
Wed Jan 12, 2011
I agree with Anna. There are too many variables to have a formula. You really need to speak with a loan officer. I would suggest you do that prior to looking at homes anyway since you will want to have an approval letter or have the ability to get one right away when you find a home. I am from the same area as you and can recommend several great local lenders. Good Luck in your search!
0 votes
Tonya Brobeck, , Everett, WA
Wed Jan 12, 2011
I encourage you to plan for vacancies and emergencies. I wouldn't spend more per month than what I could afford should the 1st rental not be paid by a tenant. Not to mention there is maintanence for 2 homes. We could afford both our house payments should our tenant bail or not be able to pay, however, I will wait to upgrade until I have a larger down payment to reduce the amount of the my 3rd mortgage payment.
0 votes
Anna M Brocco, Agent, Williston Park, NY
Wed Jan 12, 2011
For an accurate answer as it relates to your overall financial information, do consider a visit with any qualified loan officer--after reviewing your information, your loan officer can make a determination on qualification and how much...
0 votes
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