If I Rent Out My Current Home Can I Get A Mortgage To Buy Another Home?
Sure, you can. It is not an issue for everyone! You may want to rent out your current home and get another mortgage to buy a new home.
Many homeowners inquire with us and ask whether they should rent or sell their home. Some of the reasons are they are in a new relationship or have a new job and want to move on. While we go over the advantages and disadvantages of these two options, the question usually comes up “Can I get approved for a mortgage to buy another home after I rent this one out?”
To Rent Out Your Home And Get a Mortgage To Buy a New Home…
Similar to when you applied for a mortgage on your current home, the lender will analyze your income, monthly debt payments (including your current mortgage), and liquid assets to qualify you for how much you can afford.
So if your current mortgage is $2,000 per month, that debt will have to be used when calculating your debt to income ratios. While it’s true you will be renting your home and collecting rent of $3,000 for example to offset this debt, some lenders are conservative and won’t allow that income since it has not been collected for a full two years. The lenders that do allow it will only credit you with 75% of that rental income due to vacancy loss guidelines. So, can you still afford this new mortgage?
During the good old days before 2008, all you had to provide was a signed lease on your home and your current mortgage was no longer viewed as a debt. Some lenders didn’t even verify the rental payment or lease. Nowadays, lenders are more conservative and will verify income listed on the application. This has helped borrowers to not overextend themselves and get into financial trouble.
Conditions When Rental Income Does Count
There are two instances.
- First, if you can prove 12-24 months of rental income on your tax return(s), usually Schedule E, and a lease agreement your lender will not count your current mortgage debt toward your new mortgage.
- And, second, your property has adequate equity (usually a minimum of 25% equity) from an appraisal, a recently executed lease, the lender will allow 75% of the rental income to be used to offset the mortgage payment.
Always check with your lender about what they will and won’t allow as they can vary depending on the loan program and lender.
Most homeowners who ask us this question are in a position to purchase a new home and rent out their current home. Usually the new job or new relationship adds income that allows the homeowner to carry both mortgages and by hiring an Orange County Property Management company, whenever your tenants decide to move out, vacancy losses are significantly decreased.
For those That Qualify to Pay On Two Mortgages, Any Rental Income Will Be Nice!
At the point your home is leased, the rental income is a bonus. Because your new purchase is based on conservative income figures, the rental money you receive is a bonus.
As effective as a professional property manager is at reducing risk while managing your property, we can’t bring your risk down to zero. Similar to all rental homes, there will be periodic repairs and vacancy on your rental property. By applying the conservative method, as opposed to the “hopeful optimistic strategy, when the unforeseen scenario arises with your rental property, you will be able to easily take care of it. It ends up being a a much better situation for everybody involved.
