If you are buying a new primary residence and own the home in which you currently live, you will have to make a decision: sell it or rent it out. A few questions to ask yourself before you make your decision are:
- Do you need the equity in your current home for a down payment on the new home?
- Will your property cash flow on a monthly basis?
- Do you want to deal with being a landlord?
- Will you qualify for a new mortgage while keeping your current home?
If you need the equity in your current home for the down payment on your new home, you have two options. One option is to sell your home. After you pay off your mortgage(and any other liens) and pay closing costs, you will have a lump sum you can roll into your new home.
Another option is to get a HELOC or HELOAN. There will be limitations on how much equity you can pull out with a HELOC or HELOAN, but it will allow you to utilize that equity as a down payment on the new home without selling your current home. This option can also limit your purchasing power if your debt-to-income ratio is already high.
If you are leaning towards renting your home, the question to ask yourself becomes will the property cash flow? In other words, will the rent payments you receive be more than the mortgage payment and other expenses you have to pay? If the answer is no, you need to consider if you are willing to cover that difference every month. If the answer is yes, think about whether or not you want to deal with being a landlord.
As a landlord, you will be responsible for your tenants’ housing. You must maintain the property and ensure that it is safe and habitable. You will also need to find a tenant which is easier said than done. Additionally, your mortgage will continue to be due each month. Therefore, if you are unable to find a tenant or if they fail to pay their rent, you will still be on the hook to make your payment. However, renting out your property can be a great way to create extra income and continue to build equity in a property.
Lastly, you need to determine if you will qualify for a new mortgage while keeping your current home. You will be able to use rental income to help you qualify with both mortgages, but the amount of rental income you can use will be cut to a lower amount for loan qualification purposes. Generally, you can only use 75% of the future expected rental income. It is important to speak to a Mortgage Loan Originator about this in advance, as every borrower’s situation is different.
If you have questions about buying a new home and if you could qualify by keeping your current home, give us a call at (760) 930-0569 and talk to one of our Mortgage Loan Consultants.
