This post is going to discuss details for home owners who want to keep their current primary residence and apply for a FHA Loan to buy a new primary residence. Because of the price drops in the real estate markets over the last few years, home loan lenders have tightened their lending guidelines for buyers who want to keep their primary residence and rent it out and buy a new house. Some buyers have been doing something called, “buy and bail”, where they obtain a home loan and close on a new primary residence at today’s reduced prices, and then they stop making payments ”walk away” from their old house because it is “upside down”. Upside down meaning the loan balance is higher than the property value.
Lenders (both FHA and conventional) caught on to this “buy and bail” practice about 18 months ago and created a guideline where you must have 30% equity in your current residence if you want to count rental income from that residence to count towards buying a new residence. If you don’t have 30% equity, even if you have a lease set up for your old residence, you must qualify for the new loan with both housing payments. So let’s say your current housing payment is $2,500/mo including mortgage, taxes, insurance, etc… And then your new housing payment will be $1,500/mo. You will have to qualify with both these payments ($3,700) plus of course your other debt obligations such as car payments, student loans, credit card payments. So as you can see, qualifying with both payments will require you to have a very large income.
Now if you do have 30% equity in your current property, you can find a tenant to lease it and count the income from the lease. This would be a huge help of course. Say in the above example you were able to lease your house for $2,500. You could count 90% of that $2,500 in rent ($2,250) towards your qualifying income to buy the next home. As you can see this would be a huge help towards qualifying for a FHA or conventional loan.
Maybe people in the situation where there current property is upside down want to do a short sale or let their house go to foreclosure and then buy a new one. Keep in mind that in most cases if you do a short sale or your old house, you will have to wait two years from the date the short sale closes until you can obtain a FHA Loan or a conventional loan. There are exceptions to this waiting period of course due to many factors such as how your prior lien holder reports the short sale to the credit bureaus. With a foreclosure you will have to wait three years from the date of the foreclosure to qualify for an FHA Loan and five years to qualify for a conventional loan. And keep in mind that if you stop making payments, it can take 1+ year for the property to be fully foreclosed. So this means four years from the date you stop making payments until you can obtain a FHA Loan and six years for a conventional loan.
Keep in mind the benefits of FHA Loans:
- Only 3.5% down payment required and that can be a gift from a relative
- Non-occupying co-signers allowed to help you qualify
- You don’t need perfect credit
- Historic low 30 year fixed interest rates
- Only 3.5% down required on 2-4 unit owner occupied properties as well
I hope this article helps you in your future plans. Please email me or call if you have further questions, 858-922-7899 and rob@affinity-financial.com.
Warm Regards,
Rob Chomentowski (Sr. Loan Officer and FHA specialist)
858-922-7899
You must log in to post a comment.