Keeping Your Existing Home When Buying A New Home

There are times when a borrower wants to buy their new
home, but want to or need to hold onto their existing
home and use it as a rental property.

In the current market, there are many homeowners who
owe more on their homes than they are now worth. Also,
they see that they could buy a comparable home to the
one that they own for a much lower purchase price.

What has developed recently is that some homeowners
found a solution to their problem that the lending community
didn't anticipate.

Before they developed credit problems on their existing
home loans, they would purchase a new home. As part of
the qualifying for the new home, they would represent
that they would rent out their existing home and move
into the new one.

The underwriting guidelines that were in place allowed
a portion of the rental income to offset the expenses
on the soon-to-be-rental property. Specifically, 75%
of the rental income was allowed to be used. The guide-
lines recognized that there would be vacancies and
maintenance costs which is why they did not allow the
full rental income.

These homeowners were able to buy their new home at a
signicantly reduced price compared to what they paid
for their existing home. After closing, and recognizing
that there was no advantage to them keeping and main-
taining the home they just departed, let that home
revert back to the lender through default and fore-
closure.

At that point, their credit becamed impacted, but because
they had already purchased their new home that they were
planning on living in for quite some time, the bad credit
that developed didn't keep them from reaching their goal.

Because this became a significant trend, there are now
new underwriting guidelines for retaining the existing
home and purchasing a new home.

1. If the current primary residence is pending sale but
will not be closed prior to the closing date of the new
primary residence, the borrower will have to qualify for
both the current and new mortgage principal, interest,
taxes and insurance amounts (PITI). No potential
rental income offset will be allowed.

2. If the current primary residence will become a second
home and there is at least 30% documented equity in the
current home, the borrower will have to qualify for both
the current and new mortgage principal, interest, taxes
and insurance amounts. This requires that there are at
least two months of PITI for both properties.

3. If the current primary residence will become a second
home and there is not at least 30% documented equity in the
current home, the borrower will have to qualify for both the
current and new mortgage principal, interest, taxes and
insurance amounts. This requires that there are at
least six months of PITI for both properties.

4. If the current primary residence will become a rental
property and there is at least 30% documented equity
in the current home, they will allow the 75% of rental income
to offset the expenses on the existing home. No longer
can the borrower merely represent the proposed rental
income, though. They would require a fully executed lease
agreement and proof that a security deposit was received
from the tenant and deposited into the borrower's account.

5. If the current primary residence will become a rental
property and there is not at least 30% documented equity
in the current home, the borrower will have to qualify for
both the current and new mortgage principal, interest, taxes
and insurance amounts. This requires that there are at
least six months of PITI for both properties.

To document the existence of the the 30% equity position,
the borrower would have to provide a full appraisal of the
existing home.

The lenders are hopeful that by instituting these changes
that they will prevent or slow down the number of borrowers
who buy the new home and then send the keys back on the
old home.

If a borrower has little equity in the home, but have the
financial capacity to qualify for the expenses on both
homes, the lenders are thinking that they will not be as
tempted to damage their credit for the future.

If a borrower has a lot of equity in the home, they are
more willing to allow the rental income offset, because
it is much less likely that the owner will sacrifice 30%
or more of the equity of the home by defaulting. They
would probably sell the home in the open market before
letting the lender take it back.

This is further evidence that the underwriting guidelines
are attacking every element of the process that they
can identify as having contributed to losses or fraud.

I always say it, but it bears repeating: You have to plan
ahead and start the conversation about what you are trying
to accomplish before you get involved in that new trans-
action.

Underwriting guidelines are more restrictive than at
anytime in recent memory, and they are changing
constantly.

Do not rely on old information or anecdotal stories from
your friends and co-workers.

Call me so that we can deal with your specific facts and
your unique qualifications.