Shaida Tafreshi - Prospect Mortgage
Loan Officer NMLS 545194
Lending Guidelines - Equity Requirement on Departing Residences in order to Count Rental Income for Qualifying Purposes
Did you know that if you are departing your primary residence or home, and are planning to purchase a new primary home, that you will need to have 30% equity in the departing residence in order to use rental income from that house to increase your purchasing power for your new home loan qualification.
Without this 30% equity, you will have to qualify for not only the new mortgage, but the old one as well. Without the 30% equity in the departing residence, you can seriously limit the purchase price you qualify for. And by limit, I mean lower…
Essentially, if you owe more on your home than it is worth, a bank or lender cannot use rental income on the departing residence to offset that mortgage, so you can qualify for just the new mortgage rather than both the old and new.
Here is an example:
Herbert Homeowner and Amy Homeowner want to purchase a new home. They already have a home of their own, and they owe $350,000 on their current mortgage and their house is worth about $500,000.
Because the amount of equity in their home (in this case $150,000) equals 30%, they can choose to rent out their departing home and the lender can qualify Herbert and Amy using the projected rental income at 75%.
This allows Herbert and Amy Homeowner to purchase their new home with a lower debt to income ratio. In other words, they can purchase a more expensive house, because the lender is counting the rental income on the old house since it is eligible to receive rental income (remember: it is eligible because it has 30% equity).
Why do lenders have this rule in place?
The reason is because if you are underwater on your home, and want to buy a new home, if lenders allow you to count rental income on the departing residence, despite having no equity, what is to stop the homeowner from walking away or defaulting on that old home/mortgage if they have trouble finding a renter?
Fannie Mae and Freddie Mac put this guideline in place because there is nothing stopping you from walking away from the underwater mortgage if you already have your new home. Whereas if you had equity in the departing residence, you are FAR less likely to walk away or default from that mortgage, as you have a vested interest in maintaining that mortgage, because of the amount of equity in it.