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
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