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We currently owe 159K on a home worth about 59K, and would like to move up to a larger home (ha ha). We purchased this home 5 years ago and our income has more then doubled in that time, so we could afford another 150K home, which would get us a lot more house then it did 5 years ago due to the housing dive in our area. We have been kicking around the idea upgrading to a larger/cheaper home.
What are the chances a bank will give us a loan on a new home, to be our primary residence, without offloading the current house (we don't have the cash to pay the extra 100K right now). The plan would be to rent out our current home at a loss of ~$200-400 a month. We have no other debt, good credit, and the mortgage/taxes/insurance on both homes would fit into our budget without the rental income (just barely) "if" we can get a loan for 5.25% or less. We currently have 20K in savings, adding ~1.5K per month, but our current house will need some work to be a rental. I would want to out 20% down on the new home so we don't have to pay PMI.
Our other option is to continue to squeeze into out current tiny house, and pay down the mortgage aggressivly, but we are looking at 4 years to "break even" and at that point we might as well put another 2 years on and own the house outright, stay a few more years to save a downpayment on a new place, and then rent it. But homes are really undervalued in our area right now, and I would love to move up while prices are so low and while we qualify for the federal tax credit for existing homeowners.
How are lenders dealing with people that would like to buy a second home as a primarly residence and convert an existing -equity home to a rental? Is it worth even trying to get pre-qualified for a loan, or with tighter lending standards and the risks of people buying a new home and walking away from the old, are banks just not making this type of loan. We really can't afford it at "investment" rates and still be able to make both payments if our current house doesn't stay rented, so if a bank won't lend to us with the new house being our primary I don't know that it is worth trying?
Lenders are going to be looking at your total debt, so you might not qualify for what is essentially a $300K mortgage. Banks are deeply suspicious of people who haven't sold their first house these days.
You might also check out posts on the dangers of having a rental and how easily it can get destroyed, along with how hard it is to keep it rented consistently. I had a rental once. I think I got a full check once a year, because every month something broke and had to be repaired. Tenants don't take care, and don't do the repairs, or limp along until it can be fixed less expensively. When they move out, they leave crud and damages that have to be fixed.
Some stuff I would think about before deciding to do this - What has changed in your family to make a house that fit 5 years ago too small? Additional kids? More 'stuff'? Are you feeling that because your income doubled, you 'need' a bigger house? What about adding on to your existing house? Are your jobs secure? What is one of the jobs disappeared? Do you have other savings (like at least 8 months emergency fund), retirement savings, etc, in addition to the $20K? If not, do you really want to spend all your savings to do this?
I guess I was wondering if they looked at (-)equity when considering your overall debt? Most mortgage calculators qualify us at qualifying for about $360K based on our income and non-housing debt (which is currently none). We owe 159K, which leaves us with ~$150-200K price range? But to address some of your questions.
We would have to drain our cash savings, leaving no buffer, emergency living expenses, etc., to put 20% down and still have to come up with closing costs. We would not need to pull anything from our IRA/401K, and could continue to contribute to retirement. Realistically, savings wise it would be better to re-consider in a year.
I am cognoscente of a rental being destroyed, not renting, etc., which is why I wanted to be able to make both payments without a tenant. Without any rental income, including what I "think" are the expenses of two homes an all our normal monthly obligations including contributing to retirement, we would have a little over $400 a month left over to apply back to building up our savings. But houses can have unanticipated expenses and $400 isn't much when you don't have any savings. Both jobs are as stable as can be expected in the current climate and cutbacks are not anticipated. But we would be trading in a secure position where we have a year of saving, and could live on one income with a few changes, to needing both incomes to pay both mortgages.
We don't "need" another house, but we would like something with more property, and a little bigger so we can have our parents stay with us when visiting. Our current house is in a marginal area, has a large lot, but is a 650sq ft 2bd 1ba, and we do not have room for guests and entertaining is tight. Adding onto it would not be practical from a design point and would be overbuilding for the neighborhood. We don't love this home enough to go another 50K upside down to make it the house we want to live in.
When we originally purchased it, the plan was for it to be a starter house and we figure we would move up in ~5 years . 5 years ago we knew we wanted property, but that was way out of our range (starting at 350K+) and this was conservatively what we could afford in a hot market (2004) with a fixed rate. We knew our income should increase, and our plan didn’t even require this house to gain value, it just didn’t account for such a big drop. In 2004 we were in our mid 20's, now in our later 20's we are kicking around the idea of having kids in 5 years or so and would eventually want a larger home in a decent school district, with room for grandparents to visit. Of coarse the 150K houses on property avaliable now do not meet all of those requirements either
You can go two ways: 1. ) as a rental, but you will have to show & they will be able to verify the income from it's renting. 2.) purchase your new home as a 2nd home, which will involve higher rates.
You can split the difference in your time response above and wait 6-mo.'s and see what you can do, that way some savings and money for down will be available or stick it out a year. The market is not going to recover that fast, and while the "great" deals may be gone, you'll be able to still find a "good" deal.
I just spoke to a mortgage lady and am somewhat in the same boat as you. My husband can get a better job in another state with his current company but we have been unable to move because we are underwater as well. We would rent it out and bite about 400 to 500 a month to cover the difference and then would hope to buy in the new state while rates are low and to get the 8,000 credit as well. The mortgage lady said they would NOT take in account any rental income and we would have to qualify for both mortgages in order to buy right now. Not sure we will be buying then.
I just spoke to a mortgage lady and am somewhat in the same boat as you. My husband can get a better job in another state with his current company but we have been unable to move because we are underwater as well. We would rent it out and bite about 400 to 500 a month to cover the difference and then would hope to buy in the new state while rates are low and to get the 8,000 credit as well. The mortgage lady said they would NOT take in account any rental income and we would have to qualify for both mortgages in order to buy right now. Not sure we will be buying then.
I wonder if your husbands company would offer relocation expenses to help?
That's fine in our case, we do want to be able to afford both mortgages without rental income. However, both PITI in our case would be about 27% of our gross income, which would be higher then recomended right?
To follow up, we were pre-qualified through Wells Fargo today for 160K, which is the price range that we can currently afford a down payment on. They are not using any rental income (which is OK) and are basing it off of our debt load (including our current house) to income. They do not appear to care about the negative equity in our current house, but did mention that a letter may be necissary prior to closing to explain why we are moving to a place in the same metro area as our current house.
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