Although every situation is unique, it is not uncommon for homebuyers to qualify for a mortgage on a new home while still living in their primary residence.
Perhaps you are outgrowing your current house, or have been forced to relocate due to a job transfer? Regardless of the motivation for keeping one property while purchasing another, let’s address this question with the mortgage approval in mind:
So, Do I Have To Sell?
Yes. No. Maybe. It depends.
Welcome to the wonderful world of mortgage lending. Only in this industry can one simple question elicit four answers…and all of them may be right.
If you are in a financial position where you qualify to afford both your current residence and the proposed payment on your new house, then the simple answer is No!
Qualifying based on your Debt-to-Income Ratio is one thing, but remember to budget for the additional expenses of maintaining multiple properties. Everything from mortgage payments, increased property taxes and hazard insurance to unexpected repairs should be factored into your final decision.
If the mortgage on your current primary residence is secured through FHA, and you are looking to take advantage of another FHA loan, then you will need to meet one of the accepted circumstances to have two FHA home loans.
What If I Rent My Current Property?
This scenario presents the “maybe” and the “it depends” answers to the question.
If you’re not quite qualified to carry both mortgages, you may have to rent the other property in order to offset the mortgage payment.
In order for your current primary residence to qualify to count proposed rent as income, you must have at least a minimum of 25% equity in your existing primary residence proven by either an Automated Valuation Model (AVM) or a full appraisal at the expense of the borrower.
If you have at least 25% equity in your home, then an executed rental agreement will need to be in place as well as both a security deposit and the firsts months rent deposited into your bank account.
In that scenario, the lender will typically only count 75% of the monthly rent you are proposing to receive.
So if you are going to receive $1000 a month in rent and your current payment is $1500, the lender is going to factor in an additional $750 of monthly liabilities in your overall Debt-to-Income Ratios.
Another detail that can present a huge hurdle is the reserve requirement most lenders have. In some cases, if you are going to rent out your current home, you will need to have anywhere from two (2) – six (6) month reserves for both the existing mortgage payment and new mortgage payment.
For example, if you have a $1500 payment on your old house and are buying a home with a $2000 monthly payment, you will need anywhere from $7,00 – $21,000 in the bank.
Keep in mind, this reserve requirement is incremental to your down payment on the new property.
What If I Can’t Qualify Based On Both Mortgage Payments?
This answer is pretty straightforward and doesn’t require a financial calculator to figure out.
If you are in this situation, then you will have to sell your current home before buying a new one.
If you aren’t sure of the value of the home or how your local market is performing, give us a ring and we’ll happily refer you to a great real estate agent that is in tune with property values in your neighborhood.
As you can tell, purchasing one home while living in another can be a very complicated transaction. Please contact us at any time so we can review your specific situation and suggest the proper action plan.
Related Articles – Mortgage Approval Process:
- Basic Mortgage Terms
- How Much Can I Afford?
- Common Documents Required For A Mortgage Pre-Approval
- Top 8 Questions To Ask Your Lender During Application Process
- What’s The Difference Between An Investment Property, Second Home and Primary Residence?
- Seven Items Real Estate Agents Need To Know About Your Mortgage Approval