Buying a home and not selling your current home?

As of October 2008 the lenders have changed the way they look at rental income if you are planning on renting out your current home and buying another home. The old rule of thumb where the lender gives you credit for 75% of rental income does not apply any longer.

FANNIE MAE rules as of August 1, 2008

It is much more difficult to qualify for the loan if you are keeping your current home and going to be renting it out and buying a new home. One of these three scenarios must apply:

1. Current home pending sale

  • The lender will count both house payments, the old house and the new house in the qualifying ratios unless there is an executed purchase contract on the old house and all the lenders financing contingencies have been cleared
  • Required cash reserves after closing; enough to make 6 months house payments on both properties, less if you can document 30% equity in the home you are selling

2. Existing home converts to a Second Home

  • Count both house payments, old and new in qualifying ratios
  • Require cash reserves of 6 months house payments on both properties, less if 30% equity in home converting to a second home

3. Existing home converts to a rental property

  • Count both house payments, old and new in qualifying ratios. Rent may be used to offset payment ONLY if a new appraisal verifies 30% equity, home is leased, and security deposit is verified
  • Cash reserves after closing, enough to make 6 months house payments on both properties

Bottom line-

Anytime you are thinking of retaining ownership in your current primary residence and need to close on a new primary residence, you must qualify with both payments and you have cash reserves of 6 months payments for both properties. The only time this does not apply is if you have 30% or more equity in the property you are retaining and a lease with a verified security deposit or the home is sold with a valid purchase contract and all financing contingencies have been removed.

Be sure and speak with your lender as soon as possible if you are thinking of retaining your current primary residence as a rental and purchasing a new primary residence. Your lender can advise you as to the best way to proceed.

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