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Buying A Home Before Selling - How Does That Work?

By
Mortgage and Lending with Prosperity Home Mortgage NMLS#386911

Buying A Home Before Selling - How Does That Work?

When someone buys a home before selling their current home, they may have a problem: if they have a mortgage on the old home, that debt is included in their debt-to-income ratio.

In the old days (pre-2008), home buyers who did not sell their home first had at least a couple of ways to offset their mortgage debt.

Some lenders would accept the income reported on a rent survey prepared by a licensed appraiser. Other lenders would accept a rental agreement.

The lender would subtract 25% of the income obtained by either of these methods off the top to account for expenses and vacancy. They would then subtract out the PITI (principal, interest, taxes, and insurance). If there was a positive balance left after this calculation, it was added to the homebuyer's income. If there was a negative balance, it was added to their debts.

Most lenders still use this method to calculate the positive income or negative debt. Now, however, there is a twist. You need to be concerned with the amount of equity in the old property. In addition, more documentation is required for rental income to be included. 

Fannie Mae now requires the following documentation to use rental income from a primary residence converted into a rental property: 

  • An executed lease agreement
  • receipt from the tenant of a security deposit
  • supporting documentation of deposit of the security deposit into the homebuyer's account
These documents seem to make sense. However, what happens if the sale falls apart? Hopefully the rental agreement has a contingency for this so the homebuyer doesn't have to move out if his purchase doesn't happen.
 
Here is the part that has changed that really can be the deal-killer, especially in this market: the homebuyer must have 30% equity in their current home in order to use the rental income. If they do not have 30% equity, even if they have satisfied the conditions above, they must include the PITI on the old home as a debt with no rental offset!
 
screwed
 
Why, you may ask, is 30% equity required to use the rental income? Fannie Mae is worried about buying and bailing. Buying and bailing means buying a new home while your credit is good, and then walking away from the loan on the old home.
 
My guess is that Fannie Mae has an interest in such a large percentage of homes, this is how they keep people in the homes with a low percentage of equity. If they can't qualify, they are less likely to bail!
 
Fannie Mae now requires an appraisal on the current home that is no more than 60 days old at closing to determine if the homebuyer has 30% equity in the current home.
 
It's critically important for both loan originators and real estate agents to stay on top of current guidelines. By the way, did you know that starting on December 12th (tomorrow) Fannie Mae is reducing their maximum debt ratio from 55% to 45%?
 

 

Posted by

Would you like to talk to Phil - call or text (650) 222-0386 
Phil Caulfield NMLS #386911 has been helping people obtain mortgages since 1985. The views, articles, postings, and information listed at this website are personal and do not necessarily represent the opinion or the position of  Prosperity Home Mortgage LLC.

 

 

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Kirsten Lindquist
Pacific Union International - Sonoma, CA
Realtor - Sonoma Wine Country

Thanks for this post.  Many of my clients are folks who buy second homes.  This is great info!

Dec 12, 2009 07:14 AM
Kirsten Lindquist
Pacific Union International - Sonoma, CA
Realtor - Sonoma Wine Country

Thanks for this post.  Many of my clients are folks who buy second homes.  This is great info!

Dec 12, 2009 07:14 AM
Vicki Pedersen
Pedersen Real Estate - Riverside, CA
Providing Exceptional Real Estate Service

This is really good information.  I've seen people do the very thing that the banks are fearing - the buyers who buy and then walk away from the first home.  Thanks for the post. 

Dec 12, 2009 07:51 AM
Gary Woltal
Keller Williams Realty - Flower Mound, TX
Assoc. Broker Realtor SFR Dallas Ft. Worth

Hi Phil, your image with tightening the screws with that 30% equity number and the max debt ratio changing is very appropriate for the discussion in this post. It doesn't seem to be getting easier to do a real estate transaction does it? Buy and bail is so shifty!!

Dec 12, 2009 09:07 AM
Cheryl Ritchie
RE/MAX Leading Edge www.GoldenResults.com - Huntingtown, MD
Southern Maryland 301-980-7566

Thanks, Phil, I am affected by this issue now so appreciate the post with the review on rentals.

Dec 12, 2009 09:31 AM
DEBORAH STONE
Balboa Real Estate San Diego, CA - San Diego, CA

I have a client who bought a new home while they planned to rent out the condo. they were living in. The rental market didn't support the rent they needed and had gotten the previous year. They can't afford to run an $800/month negative cash flow, and now live in their new home with this condo threatening to throw them into a "short sale" situation and destroy everything they worked so hard for...through no fault of their own!

Dec 12, 2009 10:27 AM
Anonymous
darrel cook

Great,,,,they should have not got as lack as they have.

Dec 12, 2009 10:38 AM
#33
Patricia Aulson
BERKSHIRE HATHAWAY HOME SERVICES Verani Realty NH Real Estate - Exeter, NH
Realtor - Portsmouth NH Homes-Hampton NH Homes

Good post today, I've re-blogged  it.....Thank you!

Patricia

Dec 12, 2009 10:44 AM
Christine Donovan
Donovan Blatt Realty - Costa Mesa, CA
Broker/Attorney 714-319-9751 DRE01267479 - Costa M

It's going to get harder and harder for people to qualify for loans which will also effect the sellers of houses those move up buyers might have purchased.  I understand the lenders are trying to limit their losses, but 30% equity when we've lost 40% of median value?

Dec 12, 2009 11:53 AM
Wayne B. Pruner
Oregon First - Tigard, OR
Tigard Oregon Homes for Sale, Realtor, GRI

Thanks for the post Phil. You have made it easier for me to explain.

Dec 12, 2009 01:16 PM
James Lyon
Vista Pacific Realty - Sacramento, CA

I believe that this is true even if your not selling your current home.

Dec 12, 2009 02:37 PM
Andrew Haslett
Van Warren Home Inspections, NAHI CRI - Fort Knox, KY
Heartland of Kentuckynulls, Best Home Inspector

Phil, the lending market continues to change. And, what changes! Several years back, more than I thought, now that I think about it, I converted my then primary residence into a rental, and bought a new home in the community to which my then employer moved me. I didn't have any trouble getting a loan.

Reading your information, it sounds as though I would not have been able to do that, if these current guidellines were in place. I would have had to sell my home, or rent in the new location. Neither option would have been desirable. In fact, the renting option might not have been possible, with one dog and four cats. And, I wanted to keep my home long-term, even if it meant it would be a rental for several years.

This new change is penny-wise and pound-foolish.

Dec 12, 2009 02:58 PM
Rob Kelly
RE/MAX Alliance - Louisville, CO
Louisville Colorado Realtor

Great timing!  I've got a client right now considering this very scenario...

Dec 12, 2009 11:39 PM
Paul Francis
Francis Group Real Estate - Las Vegas, NV
Las Vegas Real Estate Agent - Summerlin Homes

Phil,

Nice post...

What are next months changes?

Dec 13, 2009 02:26 PM
Bob & Leilani Souza
Souza Realty 916.408.5500 - Roseville, CA
Greater Sacramento Area Homes, Land & Investments

Congrats on the feature, Phil...it was definitely well-deserved! I'm also going to re-blog this. :)

Leilani

Dec 13, 2009 10:03 PM
Anonymous
Portable Storage

Great post and Thanks for informing us about such an important point during buying new home.

Thanks,
Portable Storage,
http://www.moveablecubicle.com

Dec 15, 2009 06:51 PM
#42
Anthony Ebright - NMLSR ID #247647 Purchase and Refinance Mortgages
FHA, VA, Conforming, Jumbo - Wells Fargo Home Mortgage - Santa Rosa, CA

Phil, Once again, you've proven you're on top of it! I've been out sick and just got back into originating loans when I came across this just last week! It looked like a good subject to post about,but you've beat me to the punch! LOL! Thanks for saving me some time with the reblog! Have a great holiday.

Dec 18, 2009 10:04 PM
Gabe Sanders
Real Estate of Florida specializing in Martin County Residential Homes, Condos and Land Sales - Stuart, FL
Stuart Florida Real Estate

Great info Phil, I hope you don't mind, but I've re-blogged this post.

Dec 18, 2009 10:20 PM
Phil Caulfield
Prosperity Home Mortgage - San Carlos, CA
I Get The Loans Done That The Big Banks Don't!

To everyone - thanks for the compliments and re-blogs. I had a busy week and fell behind on responding to comments. 

Dec 18, 2009 11:24 PM
Anonymous
Jeff

Thanks for writing this article.  Unfortunately it was not what I wanted to hear as we are in a situation where we are needing to relocate for work but are stuck with major negative equity in our current home.  We were hoping to rent it out as the rental market is strong enough to support around $600 profit per month and then buy a new primary residence in our new city.  Looks like we will have to rent out and rent a new home which is not a great scenario.  Not many options unfortunately!

Jeff
Complete Reviews
http://www.CompleteReviews.net

May 22, 2010 05:39 PM
#46