Gary Miljourn in Arizona put togehter a very informative post about Buying a home when your current home is 'underwater'. The outline below is very detailed. Gary is a mortgage professional in Arizona and has been in the industry for years. If you live in Arizona, know someone that does, or are considering a move, you should contact Gary.
Great information here Gary!
Can I buy another home if my house is underwater?
Did you know that about 50% of all homeowners in Arizona owe more on their current home than what the home is valued at. This is a shocking statistic, but this information becomes very important once a decision is made that you need to move. Every week I get calls from clients wanting to know if they can get approved to buy another home and rent out their current home. The answer is Yes, but with many lender guidelines. Since most homeowners are underwater, the banks are being very careful on these guidelines. If you fit the guidelines correctly, then buying a new primary home and renting your existing home is going to be acceptable, but if those guidelines are not being met, then the loan will be declined.
First of all the property being purchased must meet Occupancy Guidelines.
Occupancy Guidelines: A primary residence is the residential property physically occupied by an owner as the principal home domicile. Among the criteria
one should consider in evaluating whether a property is a principal home are the following:
- It is occupied by the owner for the major portion of the year
- It is in a location relatively convenient to the owner’s principal place of employment
- It is the address of record for such activities as federal income tax reporting, voter registration, occupational licensing, and similar functions
- It possesses the physical characteristics to accommodate the owner’s immediate dependent family.
- The borrower states an intention of occupy the property as a primary residence.
If these guidelines cannot be met on the new home purchase, then the loan cannot be approved for a primary residence use. The loan approval for home financing would need to be classified as either a 2nd home or investment property.
Once occupancy is established to be legitimate, then the guidelines will fall either under FHA or Conventional Guidelines:
FHA Guidelines: Converting Existing Homes to Rentals
Rental income from the borrower’s current primary residence is permitted, provided at least one of the following FHA requirements is met:
- The borrower obtains new employment or a job transfer that is not within a reasonable commuting distance of the current primary residence or
- The borrower has a 25% equity position in the current primary residence as evidenced by an appraisal or sales price with the most recent six months
- If one of both of the requirements above are met, all of the following documentation is required:
- Fully executed lease agreement (a 25% vacancy factor will be applied to the monthly rent stated on the lease agreement) and
- Evidence of the borrower’s receipt of the security deposit and
- Evidence of the borrwer’s deposit of the security deposit to his or her bank account
Basically if there is 25% equity in your current home, we can use rental income to offset the debt. Otherwise both debts would have to be counted against the borrower.
Conventional Guidelines: When converting a primary residence to an investment property
The underwriting guidelines will use 75% of gross rental income as stated on the lease as evidence of rental income or to offset the payment if the
following conditions are met:
- There must be documented equity of at least 30% in the existing property derived from at least a 2055 exterior-only inspection (drive-by appraisal), dated no more that 60 days from the Note Date.
- The rental income must be documented with a copy of a fully executed lease agreement and
- The receipt of a security deposit from the tenant and deposit into the borrower’s account.
Basically if there is 30% equity in your current home, we can use rental income to offset the debt. Otherwise both debts would have to be counted against the borrower.
Last, the underwriter will require a letter of intent for moving and the reasons have to meet a common sense approach of why someone would be moving such as upsizing, downsizing, moving closer to work, etc. If the intent is not clear or does not makes sense, the underwriter could decline the loan.
If you are thinking of buying again and want to convert that current home into a rental and have questions if you can qualify, please do not hesitate to give me a call.