Buying new house and using current home as first rental ?

Question

I am trying to figure out a way to get started with my first deal without having to wait too long while waiting for my savings to grow. I have been thinking about possibly renting out my current home and buying another home. Obviously, I'd still have to come up with a downpayment on the new home, so I'm wondering if trying to find a person willing to do seller-financing would be an option. I'm thinking I might offer 5-10% down with 7% loan rate (house has been on the market 1 year). If I could get such a deal structured how might that work in a year or two if I wanted to actually obtain a bank loan on the property? Would it be a new loan with a downpayment? Or a refinance?

Are there any other aspects of this I am not considering that I should?

Matt Vogt · Answer

Some lenders have a residency clause in your mortgage requiring you to live there for a certain duration. Typically its 1 year, but as you just re-fi'd, I  would read those loan agreements to verify. The likelihood of getting caught probably isn't high, but the risks certainly are (having your mortgage called, god knows what else). Sounds like the 5% down conventional route might be a good option for you.

Best of luck

Andrew Halbert · Answer

This is the same strategy I used to get into a better primary residence for my family and add our first property to our portfolio.

I put a Heloc on my primary, pulled out the DP for our new primary house from that heloc.  I was able to grab a conventional 30 year on a 255K house with 20% down.  The entire DP was from the heloc on our primary residence at the time.  It was tricky though, they bank was not thrilled with where the DP was coming from. What did help was that I had good credit, great work work history and good income.  They absolutely figured in my heloc payment into the equation.

My broker was good and was able to structure this well so things looks as good as they could to the bank.  but YES, traditional lenders are VERY interested with where the down payment comes from.

If it's anything other than good old fashioned saving, then be prepared to prepare statements, letters, explanations etc.. It's not impossible obviously but is much more effort.  At the end of the day if your DTI, job history, credit scores, employment history are good, you are probably going to be able to make a non-traditional source of DP work.

IMO, and it's just MO, I would exhaust all efforts to use a traditional mortgage. Rates are so low and the process is pretty straightforward.  Save the creative financing for when you have no other options.  I have a feeling you still have options to go traditional.

Albert Bui · Answer

Its not the banks themselves that check for where the down payment comes from its the government who insures these loans who require us to verify these funds otherwise they will not insure or buy the notes from us.

So yes we have to verify all funds used to close every deposit generally with FHA over 500 and with conventional every deposit over half of your monthly qualifying income so if you make 8k a month, all deposits over 4k as an example. FHA is more a  stickler since its a higher degree of govt insured program.

the 3.375% you mentioned above was that with FHA (refinance you mentioned)?

As long as you plan your income on your next purchase ahead of time, along with where the down payment and reserve assets will be coming from, and maintain your credit scores you should be fine to fly through the lending process.

Jassem A. · Answer

Why not obtain a conventional mortgage at 5% down? Most owners will not consider financing or cannot finance because they have a mortgage on the property or their realtor will not recommend it. Bank rates are also much lower than 7%.

Albert Bui · Answer

depends on your equity in the property a year from now, as long as your DTI works out and there is sufficient equity, and your credit is in line with guidelines you'll be fine.

you dont need to wait any amount of time to do a rate and term refinance anyway the 6-12 month rule/guideline is for cash out refinances only.

Nick G. · Answer

Not sure how the market is in your area, but if that house has been on the market for a year, you may not need to even offer such expensive terms. Not a bad way to go though in my opinion, if you can pull it off. As for your question, if going through conventional financing, it typically would be a cash-out refi, which generally requires a decent equity position in the property (20%+ I believe if it's a rental.)

Get the property as low as possible, it will make it easier for you to walk in with equity, which will make it easier to pull cash out in the future if that is your goal.

Andrew Halbert · Answer

I didn't explicitly say "ohh by the way I don't live there anymore", but we changed our mailing address with the bank and continued to have all our business accounts at the same branch. etc...  They are getting paid, so I don't think they care.

Brian Garlington · Answer

@Jeremy Morris

I'm actually doing the same thing right now. If you our your spouse are veterans you can obviously get a VA Loan for no money down.

If you're not a veteran than why not get an FHA Loan? You only need to put 3.5% Down. As for renting out your house a couple of good sources to get an idea of what you can rent it out for are Craig's List, RentoMeter and Zillow.

Have you investigated why the property that goes for less than the rest in the neighborhood has been on the market for a year?

Jeremy Morris · Answer

Thanks @Matt Vogt I will certainly have to double check the paperwork. We actually have not even closed on the refi yet.

Jeremy Morris · Answer

Thanks Andrew, good info. I don't think I have enough equity in my current home to get a full 20% dp on the new house, unfortunately.

On another note, do I need to tell the lender on my original house that it is no longer my primary residence?

Buying new house and using current home as first rental ?

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