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A couple of questions about and idea my wife and I are toying with. We have only been in our current home about 2 years, and while we like it we don't love it. The other day we stumbled across a house that ticks all of our boxes, and would make us move if everything came together nicely. Our long term goal was to convert our current home to a rental (we were planning to do this around the 5 year mark, rather than 2 yrs). We purchased the this home in this neighborhood, near this school, for that specific reason. We are potentially bumping up our time line quite a bit though.
My questions pertain to converting our current primary residence to a rental, and how that will effect our DTI. What are the rules as far as counting rental income as income when calculating DTI? I've heard that the loan has to be at a certain LTV, but unsure of what that # is. We currently owe approx $242k on our current mortgage, the Zestimate (I know not and actual appraisal) is at $307k, and our agent has said if we were to list our home she would list it at $325k. So we are probably in that 75-78% LTV range. As we are currently living in this home, and won't have it rented prior to closing on the new house and moving out; how would we go about documenting what the rental income would be?
I know there is a potential that we will need to qualify for both loans simultaneously, with nothing accounted for in rental income. If that were to be the case what is the maximum allowable DTI? I work full time, 100% commission and had $116k in income for 2014, my wife is a self employed photographer who earned $52k in 2014. Our current mortgage is $1650 including all insurance, hoa, taxes, ect, the estimated new mortgage would be ~$2300, plus two car payments, and some incidentals our monthly revolving debt would be ~$5000, vs. our monthly income @ $13900.This puts our debt to income ratio at about 35-36% if we had to qualify for both mortgages. Is that something that would fly? Am I doing this math right? My credit score is in the 750's depending on which bureau is pulled, and my wife is 800+.
We are pretty excited about the potential of this new home, but want to remain emotionally detached until we see if it is realistic or not. This home is in a desirable established neighborhood which homes don't come up often. We are also hesitant to waste the time of our lender until we have a firm idea of what is necessary to qualify, and are confident that we should be able to do so. We are in Washington state.
You need 12 months' history on rental income for it to count these days. Back in the day, you could submit a lease showing you would be getting income, but not anymore. You would need to qualify for both mortgages in order to get the loan.
If your back ratio is below 43% carryinging both homes and all reoccurring consumer debt without rental income, you are fine. Both, you and you wife's returns need to be analyzed for 2 years to determine income. This is with a minimum down payment, with mortgage insurance.
If you are putting 20% down, there are portfolio programs that will count the use of rental income without regard to equity in the home turned rental.
If you really have found ��the home ��I recommend you get prequalified by a loan officer and do what you need to get the home. (There's a perfect home I found 20+ years ago, and I still regret not moving on this home). Start turning over those rocks!
(Not everyone requires a 12 month rental history on a rental and definitely not when you don't need the income).
Can someone explain to me how the DTI/ income is analyzed over the two year period?
My income for 2013 was $90k, the reason for the jump in income was a promotion I received 6 months ago. While I am still 100% commission the pay structure is different and more stable. My wife has been building her photography business over the past 3 years, while working a full time office job. This past May she made the transition to full time photography when our son was born. In 2013 she has $30k in income from her office job, and $30k from photography. Can someone explain to what # would be used as our "income"? Is it an average over the two year period?
We will be putting 10% down, we could do 20% but it would pretty much tap out our liquid cash, and I'm not willing to do that.
Can someone explain to me how the DTI/ income is analyzed over the two year period?
My income for 2013 was $90k, the reason for the jump in income was a promotion I received 6 months ago. While I am still 100% commission the pay structure is different and more stable. My wife has been building her photography business over the past 3 years, while working a full time office job. This past May she made the transition to full time photography when our son was born. In 2013 she has $30k in income from her office job, and $30k from photography. Can someone explain to what # would be used as our "income"? Is it an average over the two year period?
We will be putting 10% down, we could do 20% but it would pretty much tap out our liquid cash, and I'm not willing to do that.
I have read stories of self-employed people getting turned down quite a lot. I think each income stream has to be treated separately, and you take the lower of the two years of income. For example, for the wife's photography business, how much did it make last year, and how much this year? Take the lower of those two numbers. For your income, if your job is a continuation of the previous job, then you take the lower of the two - income for 2013 or for 2014. Repeat this for each separate job or income source. Then add them all up.
I have read stories of self-employed people getting turned down quite a lot. I think each income stream has to be treated separately, and you take the lower of the two years of income. For example, for the wife's photography business, how much did it make last year, and how much this year? Take the lower of those two numbers. For your income, if your job is a continuation of the previous job, then you take the lower of the two - income for 2013 or for 2014. Repeat this for each separate job or income source. Then add them all up.
Well that sucks. As for my income, I still work for the same employer, but have a different position (sales vs. sales management), how is this treated?
Your last two years of tax returns and schedules will have to be analyzed. Yes it is possible to get credit for a rental income property with certain lenders, but single family homes with only 20% equity tend to operate at a calculated loss.
Just sell your old house and buy a rental one in the future if this is truly the one.
Yep. I have to agree with thelopez2. You'll have dual mortgages, and you mentioned dual car payments. That adds up. Then your tenant calls you and says the roof is leaking.... or a tree fell over etc. As a landlord, you have to take care of your tenant. (Which is to say, your house they are renting). Crap happens. We rented out our Florida house after we moved to Colorado. 3 hurricanes in a row did a little dance on our Florida roof. We had to buy plane tickets for starters...tarp the roof and get in line for a new roof to be put on. We weren't slum lords in the least. We did everything we could to make them safe and comfortable. Fortunately for us (as we were waiting for at least another two weeks to get the roof replaced), we got a call from someone who said they wanted to buy that house. He said to cancel our contract with the roofer and any other contracts we might have regarding the storm damage because he fully intended to gut it and pop the top for a second story etc. YOWSA! We got lucky!
I've been tossing ideas around in my head on this for a few days and think I have come up with a solution. Rather than putting 10% down on the new home we will do 5% instead, and use those available funds to pay down our current mortgage to <75% LTV. This would allow us to count 75% of the rental income, and make qualifying for both properties a breeze. Anything I'm missing?
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