When Renting Out Your Home Can Help You Buy a New One

One of the biggest obstacles homebuyers will face is being able to show enough income to offset their debts — in addition to a proposed housing payment. If you don’t show enough income to offset your debts according to the bank’s requirements, you may have trouble getting the loan. With that in mind, there is a little-known lending guideline that allows you to show more income, which can help you seal the deal. In order to take advantage of this guideline, you have to turn either your new home or your current home into an income property. Essentially, by doing this, you can use the projected fair market rents for your property in order to show additional income, but you need to meet one of the following financial requirements in order to qualify. If you are purchasing a home, you can use the projected fair market rents to offset the mortgage payment, but you’ll need to have a 20 percent down payment in order to use this strategy. If a new property is going to be $2,400 per month, fair market projected rents on the current residence are $2,200 per month. Lenders will use a 25 percent vacancy computation to hedge against default. Using the 75 percent vacancy factor, you’ll get the additional benefit of $1,650 per month more income, so in other words, your take-home income only has to offset a liability of $750 per month versus $2,400 per month. A $750 per month differential is equivalent to as much as $175,000 in purchasing power. If you don’t have enough income to purchase the new home and debt service the other, but have 30 percent equity in your primary home and you plan to keep the home as a rental, the same rule applies here — a lender will use up to 75 percent of projected fair market rents to offset the loan payment. If purchasing an income property, expect the transaction to bear a higher appraisal fee. A traditional lending appraisal is typically around $400-$500. However, it is not unreasonable to expect upwards of $650-$700 for an income property appraisal (the same goes for an additional unit on the home). You’ll also need to provide a fair market rent survey and operating income statement as a component of the income property appraisals. | Read More