How to Buy a New Home When Keeping Your Existing Home

Have you tried buying a home in the last year or so only to find "moving up" isn't easy when you're keeping your existing home?  This may be due to the conversion underwriting rule adopted by Fannie, Freddie and FHA.  Now this rule has been in effect for a while, so most Realtors know it exists and warn buyers before they make plans to buy a new home.  However, I still get a couple calls a month asking for clarification on the rule, so here's a pretty detailed explanation on how to determine whether you can buy a new home if you're keeping your existing home.

What is the conversion rule?  The conversion rule applies to buyers who are obtaining financing on the purchase of a new home, and keeping their existing home.  If the existing home is "converted" to a rental property, the buyer must prove the existing home has 30% equity in order to use the rental income to offset the existing home's mortgage when qualifying for the new home's financing.  The equity requirement is 25% when the new home will be secured by FHA financing.

How is the equity in the existing home determined? Through a property appraisal, or county tax records.

What if the 30% equity (25% for FHA financing) cannot be proven? Then the borrower must qualify for the new home's financing by supporting both new and existing mortgage payments against their income.  This can prove difficult for some borrowers.

How do I estimate the value of my existing home before ordering an appraisal?  Ask your Realtor to perform a Comparative Market Analysis (CMA).  This will at least give you an idea if your home is close to meeting the equity requirement.  Its also important you speak with a lender (eh-hmm) to determine whether you need to use the rental income to qualify for the new mortgage.  Why order an extra appraisal if not using the rental income doesn't affect your mortgage qualification?

Are there any additional asset requirements? Yes, in addition to the cash you'll need to meet the closing and reserve requirement on the new home, you'll also be required to have between 6-12 months worth of mortgage payments in reserves for your existing home.