Buying a second home without selling the first
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Anonymous
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With 2 kids, we are rapidly growing out of our 3 bedroom TH and would like to move to a SFH within the next year or two. Rather than do the normal thing and sell our first home and put the equity toward buying our second home, we would like to hold on to our townhouse and rent it out. We are a couple blocks away from the Ballston metro, so we believe the demand is there. Also, based on rental rates in the neighborhood, we should be able to clear $1,200/month in excess of our mortgage payment (inclusive of taxes/insurance). We think that the long term return on the rental exceeds the benefit of a lower mortgage on the second house, considering the current interest rate market.
So, we have enough saved to put 20-30% down on our new house, but I am worried about how lenders will view our first mortgage. Will it make it harder for us to qualify for a mortgage on the second house? Does it count against our debt to income ratio, or can they factor in the rental income on the first house as an offset? Are there other issues that I should think about before we go down this path? |
Anonymous
| We were approved to buy before selling, but opted to sell first to avoid the stress. The lender does include both mortgages in your debt to income ratio. It may be different if you have a real life renter with a lease, but they will not consider a hypothetical renter. You also need to have assets sufficient to cover both sets of closing costs, down payment on new home, and six months of mortgage, property tax and homeowner's insurance on both homes. |
Anonymous
| Just realized that you were planning to rent long term. They will not obviously require closing costs for a property you are not planning on selling, but may require more in reserves for the rental property. |
Anonymous
| I think you want to have a rental tenant in place when you're going into the mortgage approval process. A friend had one rental condo and one condo in which she lived when she bought a home with her boyfriend. The bank asked for signed leases on both condos for her to qualify for a better rate, I believe. |
Anonymous
| They won't let you get a second mortgage until you have established rental income. Catch-22. |
Anonymous
Obviously that depends on what OPs income is. I own two non rental houses, my primary home and a summer home, and have mortgages on both. If OP needs the rental income to qualify then that's a different story. |
Anonymous
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I have done this several times and can work out fine. Before I have a ratified contract on my home I start marketing the old one on craigslist. Sometimes you can get a lease signed even before the offer is accepted on the new house if you live in a good rental area. Remember that only 3/4 of the rent will be considered for income so make sure the numbers work for you. They assume the 1/4 is for up keep and other things. From your numbers you should be fine.
The biggest problem is the logistics. If you were to rent the place it will usually be for the last week of month or first week of month for move in. You have to make sure your closing date works with that or there is a big gap between your closing on your home and tenants move in date. You may want to push lease start a full month or several weeks out from your closing date just incase things slip. If you can get a sign lease and a deposit you will look even better to your lender with the extra income. |
Anonymous
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OP here. Thanks for the input. So far, it sounds like this is do-able. We can probably make the debt to income ratios work on both houses, as the principal outstanding on our current mortgage is pretty small relative to our HHI, but that's definitely a good point to keep in mind.
Would we qualify for a regular rate on both homes or will we have to pay a higher rate, since one is now effectively an investment property? We wouldn't refinance the first house, so I would assume that rate is safe, but what about the second? |
Anonymous
| we bought our SFH without selling our condo with a $400K mortgage on it. The condo is in a hot neighborhood and rents easily. NO lender refused us because we were not selling the condo. |
Anonymous
| Friends did this recently with no problems getting the mortgage. They found renters a few weeks after they moved. Good luck! |
Anonymous
Not necessarily. Our lender didn't ask for any proof. |
Anonymous
Because you can easily afford both mortgages even without rental income. OP's situation might be different. |
Anonymous
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We bought our second house without selling the first. We had to have our first mortgage calculated into the equation of debt to income ratio, but otherwise it all worked out fine. First house was a conventional loan, second house was as well. We put down 10% on second house in cash AND paid up-front PMI (make sure you understand how the laws changed around PMI in 2013; it's ridiculous how some people have no clue that PMI payments are for the life of the loan in many cases now).
We do have a tenant in the first house now, but the bank didn't need any of that detail because it wasn't factoring in. |
Anonymous
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18:40 here. Sorry OP I just saw your follow up question.
Our rate is/was 5% fixed for a house we bought in 2003 (the first one). House was a foreclosure, $171K Our rate is 4.75% fixed for the second house. Jumbo loan, $500K. The hardest thing for me was that the rate was 3.5% quoted when we went under contract on the house but by the time it was built the rate had hiked up an entire freaking point. UGH. |
Anonymous
| We just had to qualify to cover both mortgages, it wasn't a problem. |