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Old 04-04-2012, 11:35 AM
 
1,593 posts, read 1,985,966 times
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Hi all, hoping some of you mortgage experts can throw me some info!

Recently did a cross country relo for work and turned our primary residence into a rental, found great tenants who are signed up for a 2 year lease. Meanwhile we are in a 6 month rental in our new city and thinking about looking to buy a house in the upcoming fall/winter market.

So my question is, with our other property now set as a rental with a two year lease in hand and 20% equity will a mortgage co even look at us for another purchase?

Last time I looked into this (over a year ago) the lenders were running scared and demanding that the "first" property have at least 30% equity for fear of the owners buying a new house and walking away from the old. Have things eased up since then?

Thanks in advance.
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Old 04-04-2012, 02:50 PM
 
Location: Southern New Hampshire
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I am in the process of doing something similar -- found a house in the neighboring town that I wanted to buy but definitely didn't want to sell my current house in this market so decided to rent it out. I have excellent credit, income, job history, etc. and basically no debt besides my current mortgage, so my lender didn't have a problem. Equity in my current house wasn't an issue (no appraisal needed -- I probably have 25% equity in that house, being conservative as banks are now) -- all they required was that I have a signed lease for at least a year (which would start within 30 days after closing on the new house) AND a cancelled check for the security deposit. They also only count 75% of rental income (even with a year's lease), which means the remaining 25% has to be included as a debt in my debt-to-income ratios. Since I have basically no other debt, it wasn't an issue for me, although it could have been if I had had a car loan, credit cards, etc.

It may depend on where you are. Where my current house is, there's a strong rental market, which may be why they count 75% of rental income from the start. I've heard from others on this board that they've had to have a year's worth of income before ANY of it counts. That would have made it impossible for me to buy the new house, so I am glad I didn't have to deal with that rule.

You might just call a few lenders in your area to see what their policies are. So much of buying a house is local!

Good luck!
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Old 04-04-2012, 03:10 PM
 
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We are doing this for the second time now. Both times our mortgage company required a signed lease (can only count 75% of it as income) and six months of saving in reserve to cover both properties mortgage payments (you can use up to 50% of your 401K to cover this if you don't have cash in the bank).

20% down was also required for the new house plus closing costs.

We had no other debt besides our mortgages so YMMV. Being able to buy a new home without selling the old one is a very good position to be in at the moment! Good luck!

[edit] Forgot to mention that we had over 35% equity in our first house and about 24% in our second home (only owned it for a few years). I can't remember what the lenders requirements were, but obviously we have less than 30% in our second home and it didn't cause a problem with our lender providing a third mortgage.
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Old 04-04-2012, 03:52 PM
 
Location: Southern New Hampshire
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Ah, I'd forgotten about the 6 months' reserves. (Colorado, thanks for the reminder!) They counted my 401(k), which honestly I thought was kind of odd as I would NEVER use it. But it made it very easy to qualify.

I got a 3.125% mortgage with only 5% down (it's a 10-year ARM, hence the low rate, but I plan to pay extra every month so at the end of those 10 years it should be close to being paid off). If I sold my current house, I would have been able to afford a much larger down payment, but as I wrote I don't want to sell in this market. I think I got a 5%-down-payment loan because of low debt & high credit score.
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Old 04-04-2012, 04:11 PM
 
3,102 posts, read 3,237,584 times
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Quote:
Originally Posted by karen_in_nh_2012 View Post
They counted my 401(k), which honestly I thought was kind of odd as I would NEVER use it. But it made it very easy to qualify.
I wonder if the bank can get their hands on it if you default on your loan? There's probably some legally binding fine print. IIRC you can get access to 50% of your 401K by claiming financial hardship.

Lets hope we never have to find out the hard way!

Looks like you got a pretty nice interest rate there. Our is significantly higher as it's fixed for 30 years, but it's still under 4% so I'm not complaining!
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Old 04-04-2012, 06:02 PM
 
Location: Southern New Hampshire
8,433 posts, read 14,546,272 times
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The interest rate was/is a special deal ... that particular loan includes $2,500 off closing costs as well. That's why I went with it instead of a 30-year fixed, which would normally be my preference. I hate paying PMI, but given that I got just about everything else I wanted, I am OK with it.

Hmmm, maybe the bank can get the 401(k) if I were to default. Didn't think of that. My job is very secure and I plan to stay here for 20+ years so hopefully no worries!

To the OP: have you spoken with any local lenders? I did online searches, then called several. The one I ended up going with is local, which I am happy about.
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Old 04-05-2012, 01:27 PM
 
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Thanks for the info, I'm encouraged and the 401K bit is a nice easter egg that I hadn't considered!

Well I'll keep hoarding money and get in touch with some lenders.

Thanks again.
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Old 04-05-2012, 01:29 PM
 
Location: Richardson, TX
11,816 posts, read 18,926,043 times
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Quote:
Originally Posted by karen_in_nh_2012 View Post

Hmmm, maybe the bank can get the 401(k) if I were to default.
No they can't. It just shows you have money in your name that you could access in the event of a job loss/other tough life event -- thereby making you less likely to default on the loan.
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