Are you purchasing a new residence while looking to hang onto your current residence?
While this is a common goal/strategy for many homeowners it can be challenging to pull off if you are trying to obtain a mortgage on a new property. This is often a challenge because, as the borrower, you will need to be able to carry the property obligations for both your current home and your future home to qualify. This will undoubtedly push your debt-to-income ratio higher, which if increased too much, could disqualify you from obtaining a loan.
Fortunately, if you find yourself in this situation, there is a potential solution. That solution would be to use rental income from your departure residence to qualify in order to offset that property’s expenses/obligations. Exactly how to go about doing this depends on the exact loan program which you are qualifying for. Do note, it can be logistically challenging to make this happen.
For conventional and jumbo loan programs you will need to obtain both a lease agreement along with a rent schedule on the departure residence. The lease agreement must be fully executed and verify that the first rent payment is due before the first mortgage payment needs to be made. Mortgage lenders can use up to 75% of the future rental income now to qualify.
If this amount is greater than the total property obligation, one must have a history of landlord or property management experience to use the excess cash flow. Otherwise, just enough of the rental income is used to offset the monthly obligations of your departure residence.
For FHA loan programs all of the following guidance above applies along with a couple of additions. The first additional requirement is that the new property must be 100 miles or further from the current residence (except for a few specific exceptions). The second requirement is that you must have at least a 25% equity stake in your departure residence. This is confirmed by an appraisal. Fortunately, excess rental income can be used regardless of property management or rental income experience.
For VA loan programs all of the above guidance applies except positive cash flow can not be used even with property management or rental income history.
If you have any questions, please feel free to reach out to discuss with one of our Mortgage Loan Originators at (760) 930-0569.