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A year ago, my husband was transferred 1-1/2 hrs from our home. I really didn't want to move, but due to the time frame (no notice) and the location, we decided to rent out our home through a property manager and we ourselves are renting. It's personally driving me crazy.
However, we had a few very bad years on our credit starting in 2008. So, it's not good. We are working our way out of that hole and there is a light at the end of this tunnel, but I'm hoping somehow to buy a house this spring. We think we'll have the 3.5% down but will be lacking the closing costs. Plus we have the issue of our credit still being low.
The house we own we've had since 2003 and have at least 30-35%+ equity in the house even in today's market because we initially put 20% down when we built the house with the help of a friend (built below market). It's a conventional loan still owned by the bank where we got it (they don't sell their loans). We initially thought the best way was to sell our house and use the cash to buy another house, but we can't afford to put it on the market and have it sit empty. We offered our renters the option to buy, but they either are not interested or cannot buy themselves. So, we are about to renew the lease with them for another year.
My questions: How should we approach buying a second home? And can we? Can we refinance our house and get some equity out of it in order to buy a second home? Will lenders allow us to buy a second home while renting ours when our income cannot cover both houses? We don't have but very little money so we can't show 6 months of payments in the bank. Do we have any options?
A year ago, my husband was transferred 1-1/2 hrs from our home. I really didn't want to move, but due to the time frame (no notice) and the location, we decided to rent out our home through a property manager and we ourselves are renting. It's personally driving me crazy.
However, we had a few very bad years on our credit starting in 2008. So, it's not good. We are working our way out of that hole and there is a light at the end of this tunnel, but I'm hoping somehow to buy a house this spring. We think we'll have the 3.5% down but will be lacking the closing costs. Plus we have the issue of our credit still being low.
The house we own we've had since 2003 and have at least 30-35%+ equity in the house even in today's market because we initially put 20% down when we built the house with the help of a friend (built below market). It's a conventional loan still owned by the bank where we got it (they don't sell their loans). We initially thought the best way was to sell our house and use the cash to buy another house, but we can't afford to put it on the market and have it sit empty. We offered our renters the option to buy, but they either are not interested or cannot buy themselves. So, we are about to renew the lease with them for another year.
My questions: How should we approach buying a second home? And can we? Can we refinance our house and get some equity out of it in order to buy a second home? Will lenders allow us to buy a second home while renting ours when our income cannot cover both houses? We don't have but very little money so we can't show 6 months of payments in the bank. Do we have any options?
Hi want2buysoon,
As long as you can document the rental income (as in claim it on your tax returns) you'll be able to use 75% of it to offset that mortgage payment. That should help you with qualifying for the new mortgage.
The only other concern will be your credit scores and history. Based on what you've said, FHA is probably going to be your best bet so you'll need to get your scores up to at least a 620. FHA doesn't normally require that you have 6 months of payments in the bank and honestly if you do have that much equity in your home you wouldn't need 6 months on a conventional loan either.
You can usually get the seller to cover most if not all of your closing costs but you'll still want to have some money set aside in an emergency fund.
Okay, well that eases my concerns. I will be doing taxes as soon as I can that will show the rental on there. And, we are working on our credit currently. My husband has already raised his score so I need to check where it is now.
I don't want to put my house on the market with tenants, because I'm afraid they will move out at the first possible chance. If they don't buy next year, it might very well go on the market because I don't want to pay capital gains tax. If we get to that point, I'd move back in first!!
Okay, well that eases my concerns. I will be doing taxes as soon as I can that will show the rental on there. And, we are working on our credit currently. My husband has already raised his score so I need to check where it is now.
I don't want to put my house on the market with tenants, because I'm afraid they will move out at the first possible chance. If they don't buy next year, it might very well go on the market because I don't want to pay capital gains tax. If we get to that point, I'd move back in first!!
You'll want to pay attention to the credit history as well as the scores. For example: you could get your scores up but still be denied for something like late payments on your existing mortgage.
You also want to be careful on your tax returns. If you have too many deductions/write offs you could end up lowering your AGI too much.
You'll want to pay attention to the credit history as well as the scores. For example: you could get your scores up but still be denied for something like late payments on your existing mortgage.
You also want to be careful on your tax returns. If you have too many deductions/write offs you could end up lowering your AGI too much.
AGI? Yes, I'm worried about that. We have a large family on one income so it's great now for the taxes, but the AGI might be too low. I never considered that, but thank you for mentioning so I will really look closely at that when I'm doing them.
Your tax returns will be the sole basis to calculate the income on the former home. The 75% rule goes out the window on an existing rental property. We only use the 75% rule for residences or new properties without a track record to calculate rent.
You can never use a cosigner to overcome derogatory credit, only for the lack of income. Unfortunately, before you can do anything, you will have to get your credit into minimum health standards. And while you are doing that, make sure you are never, ever late on that mortgage. Late mortgage history (with a tenant), coupled with recent late consumer credit, would make it next to impossible to refinance that home or buy another.
You also need to speak with an accountant before selling the other home - since it is no longer your primary residence, you could be setting yourself up for a large tax liability because now that home is subject to different tax guidelines. Nothing like having your profit sucked down by the IRS.
My recommendation is you first sit down and speak with a loan officer and get a specific game plan for your purchase, with the second step, talking to an accountant or tax planner about the investment home.
Your tax returns will be the sole basis to calculate the income on the former home. The 75% rule goes out the window on an existing rental property. We only use the 75% rule for residences or new properties without a track record to calculate rent.
Well, it looks like income on the taxes, but since we paid $2000+ more in 2011 than we took in because of the initial property management fee along with their monthly fees and the expenses for repairs. So, that's going to end up being an expense in the overall. Is that going to hurt us?
Quote:
Originally Posted by SmartMoney
You can never use a cosigner to overcome derogatory credit, only for the lack of income. Unfortunately, before you can do anything, you will have to get your credit into minimum health standards. And while you are doing that, make sure you are never, ever late on that mortgage. Late mortgage history (with a tenant), coupled with recent late consumer credit, would make it next to impossible to refinance that home or buy another.
I read several websites that said you could have a cosigner for bad credit, but if you tell me that's not the case, I believe you. I'm hoping not to need one by getting the scores high enough anyway, but I'm also anxious to buy sooner than later. We were late on our mortgage (30 days behind) after our personal financial crisis (unemployed almost 5 months), but we finally got caught up and for over a year, we've been on time every month.
Quote:
Originally Posted by SmartMoney
You also need to speak with an accountant before selling the other home - since it is no longer your primary residence, you could be setting yourself up for a large tax liability because now that home is subject to different tax guidelines. Nothing like having your profit sucked down by the IRS.
My understanding is that I have to have lived there 2 years of the last 5 not to pay capital gains tax. We have lived there 4 of the last 5. I have 2 more years before I would have to pay if we sold unless I'm missing something.
Quote:
Originally Posted by SmartMoney
My recommendation is you first sit down and speak with a loan officer and get a specific game plan for your purchase, with the second step, talking to an accountant or tax planner about the investment home.
We did a few months back and were told we needed more positive credit (credit cards, etc) showing currently monthly payments. We are trying to build that now. I haven't talk to an accountant, but I agree we should get a plan of what our goals are. I can't say I even know. My husband is going to talk to his boss because he could be transferred again. He's going to see if that means we have to hold off buying. I hope not because renting sucks in my opinion. I don't know how people do it longterm.
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