how does it work if you want to buy a 2nd house?

[TimtheGuy]

I know all about the amortization tables and the interest. With them in mind it sounds like you should keep just the one house and pay extra like you plan.

A lender will not count any potential rental income as you have no history as a landlord and do not show rental income on your tax returns. Niether you nor the lender would want to rely 100% on the rental income to cover the payments for the reasons you mention. It is cash flow and down payment that will allow the purchase of a 2nd home, not equity in the 1st.

My point was simply to show you a way that it might work as from the sounds of it your current debt structure will not allow you to purchase the 2nd home any time soon.

[Lacerta]

If finances are questionable enough that you have to ask the question, you probably shouldn't keep a rental property. Have you already done the math to know whether the property will cash flow monthly? Have you figured in the fact that between tenants you will have expenses? Have you calculated in the fact that, at some point, some tenant is almost certainly going to either not pay rent or trash the place and you will have expenses to either evict or fix damages? We've had damages as high as $15k on a rental property before, and we've had as high as $5000 (counting unpaid rent, damages, & legal fees) several times. Are you prepared to handle that if it happens? If not, you probably shouldn't get into the rental business. Are you prepared for the fact that your payment will go up because you no longer have the homeowner's exemption on your taxes and your insurance may increase? Are you prepared to research landlord tenant law for your area to the point that we don't see someone post on these forums in a few years about you? If not, you probably shouldn't rent out your property.

As for whether the lender would give you a loan, think about everything you've said from a lender's point of view.

Your income is insufficient to make both payments if a renter flakes on you or you have a vacancy.

Your savings are insufficient to put 20% down on the new property, so if they have to foreclose on you, they are unlikely to get their investment back, even in an up market.

What would you do if you were the lender?

If you can make the first loan go away completely or save 20% for the new place, you'll probably be in good shape If not, I don't think the best question is whether or not you CAN get a loan, but rather, whether or not you SHOULD get a loan.

[campmom123]

Lacerta- I consider myself "allergic to debt" so it's highly unlikely that I would willingly get myself into a financially uncomfortable situation like that. I'm simply clarifying that that is indeed the common practice-- for lenders to not lend unless you can cover both loans without the rental income. Timtheguy answered plainly and helpfully, and yes, that makes sense and I would do the same if I were the lender.

That's why our plan was to not buy the 2nd home until this one is paid for or close to it and we could easily pay the 2nd loan alone, but then renting one of the properties would allow us to pay it down faster (I realize being a landlord is work and I am inexperienced to know all the things/costs involved, but my allergy to debt makes me want to try )

I asked these questions just because as we deal with the "buyers adjustment time" and over new/reduced listings we can't do anything about right now, I was wondering "what if" we find our dream home BEFORE we are either paid down on this home or save up 20%. Just wondering if there were any options for that. Sounds like there could be, but less likely. Our situation would have to look different than it does right at this moment.

[Jenn0421]

I know this is an old post but I don't think you're getting ahead of yourself AT ALL here! It takes time and planning to make bigger purchases (like a home) work out sometimes. Especially when you already own one. You need to know the*answers to these questions NOW. I'm not sure what you decided since this was written so long ago, but I hope you were able to purchase a new home because it doesnt sound like there are any reasons to keep that from happening. If you have not yet purchased a new home. Shop around for a lender. This sounds like something you can easily do. And while you definitely want to avoid additional debt, it sometimes makes sense and can be a helpful tool while building wealth and assets. Anyway, just my opinion. I just think there is no way you're getting ahead of yourself. You have some long term financial goals and you're determining the best way to achieve them with the actions you're taking now.