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Old 08-23-2008, 05:46 PM
 
Location: California
1 posts, read 2,269 times
Reputation: 10

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I currently own my home and want to rent it out so that I can purchase a smaller home for my family. I am upside down $108K and the rental income is about $150 per month more than what I pay. Will a conforming loan meet my needs, or am I screwed with the new rules that have been applied to the conventional type loans that require 30% equity?
Thanks in advance
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Old 08-25-2008, 10:57 AM
 
24 posts, read 102,273 times
Reputation: 29
You can still get a loan if your ratios are in order. Keep in mind that because you don't have a history of renting out your current home, a lender will only count 75% of your rental income toward your ratios.
Example:
Rental Income = $1000
75% of Rental Income = $750
Mortgage on rental = $1150
Amount added to your debt to income ratio = 1150-750 = $400.

So, as long as can still qualify with $400 added to your ratios, you'll be OK. This is a general rule for people who are buying a new home and plan to rent their current home. Some banks might allow you to use the full rental income. Look for banks that hold the mortgages they underwrite, like Suntrust.
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Old 08-25-2008, 02:46 PM
 
Location: central, between Pepe's Tacos and Roberto's
2,086 posts, read 6,097,275 times
Reputation: 952
Quote:
Originally Posted by whatshouldido View Post
You can still get a loan if your ratios are in order. Keep in mind that because you don't have a history of renting out your current home, a lender will only count 75% of your rental income toward your ratios.
Example:
Rental Income = $1000
75% of Rental Income = $750
Mortgage on rental = $1150
Amount added to your debt to income ratio = 1150-750 = $400.

So, as long as can still qualify with $400 added to your ratios, you'll be OK. This is a general rule for people who are buying a new home and plan to rent their current home. Some banks might allow you to use the full rental income. Look for banks that hold the mortgages they underwrite, like Suntrust.
Without the 30% equity or 2 years landlord experience (with tax returns showing Schedule E) plus 6 months of reserves, FNMA will not allow any of the rental income to be used to calculate the DTI ratio.

Freddie Mac may not have this rule, and I'm pretty sure that FHA does not.
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Old 08-25-2008, 05:07 PM
 
Location: Cary, NC
1,036 posts, read 3,627,489 times
Reputation: 503
Quote:
Originally Posted by Daddys///M3 View Post
Without the 30% equity or 2 years landlord experience (with tax returns showing Schedule E) plus 6 months of reserves, FNMA will not allow any of the rental income to be used to calculate the DTI ratio.

Freddie Mac may not have this rule, and I'm pretty sure that FHA does not.

Good call.... FHA does not have that rule and will use 75% of rental income. The rule is you MUST have a signed lease for at least 12 months. If there is no lease or it is month-to-month they can not use the rental income.

Last I checked Freddie Mac was also not counting any rental income unless the borrower has "landlord experience".
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Old 08-25-2008, 06:16 PM
 
Location: Plano, Texas
1,676 posts, read 6,333,376 times
Reputation: 684
Hate to be the bearer of more bad news, but if you are buying a smaller home as your primary residence, the lender may not believe you and force you to buy as an investment property. In the lenders eyes, if you have a home lets say valued at $200,000 but then want to buy a home for $120,000 as a primary, the lender will have a big problem believing that. I would strongly recommend that if you do move forward, have your LO help you complete a letter of explanation as to why you would move to a lesser home. I just had this same scenario with a client, her primary at this time was valued at $260,000 and she was buying a new home $200,000. I had her write a letter of explanation showing all the reasons why she is moving down in house. Her reasons where closer to work for both her and husband, better school district and she already had someone lined up to rent her current home with a signed lease agreement and canceled check for deposit. We also included evidence of her starting the enrollment process for her childs school. The more you can show the better. Some loan officers will not want to address this up front in the hopes that the lender does not notice, but i would address it up front so it does not appear that you are trying to slide something past the underwriter. And the above posters are correct that with no land lord experience, you will not be able to use the rental income as income.
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Old 08-25-2008, 07:39 PM
 
Location: central, between Pepe's Tacos and Roberto's
2,086 posts, read 6,097,275 times
Reputation: 952
Quote:
Originally Posted by VictorBurek View Post
Hate to be the bearer of more bad news, but if you are buying a smaller home as your primary residence, the lender may not believe you and force you to buy as an investment property. In the lenders eyes, if you have a home lets say valued at $200,000 but then want to buy a home for $120,000 as a primary, the lender will have a big problem believing that. I would strongly recommend that if you do move forward, have your LO help you complete a letter of explanation as to why you would move to a lesser home. I just had this same scenario with a client, her primary at this time was valued at $260,000 and she was buying a new home $200,000. I had her write a letter of explanation showing all the reasons why she is moving down in house. Her reasons where closer to work for both her and husband, better school district and she already had someone lined up to rent her current home with a signed lease agreement and canceled check for deposit. We also included evidence of her starting the enrollment process for her childs school. The more you can show the better. Some loan officers will not want to address this up front in the hopes that the lender does not notice, but i would address it up front so it does not appear that you are trying to slide something past the underwriter. And the above posters are correct that with no land lord experience, you will not be able to use the rental income as income.
Nice catch! I did not notice the smaller home comment, but this is absolutely correct.
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