How to buy a new primary residence and rent out our current house

[Mel F.]

I've found alot of good research on here about my pending scenario, but nothing quite fits exactly...

Our situation: My wife and I purchased a brand new house (4bd/2.5br) three years ago with an FHA loan. We are right at 30K in equity and starting the HELOC process to tap into the equity (We've been pre-approved, just awaiting fresh appraisal).

The current 3.375% mortgage is only in my name, but of course the deed is in both of our names. Monthly notes are around $965 and we'll be paying PMI for about 10 more months. Once PMI drops, we'll save about $140 month. Fair market rent in the area is $1200 but you can easily demand more based on nearby schools, neighborhood amenities, etc.

We want to move into a new house in the next couple of months for a pending household size increase. Recently entering into the REI arena, I figured this would be an excellent opportunity to get some cash flow.

We're considering using the HELOC to pay the down payment on a new house using an FHA, USDA(If eligible), or a Conventional 97 loan in my wife's name. I'm accounting for about a 5 month holding cost until our first qualified renter shows up. Other houses in the neighborhood have rented fairly quickly and for long periods of time (I was the HOA Treasurer of two years).

My questions:

1.Rent or Cash out?

2. FHA loans require owner-occupancy or enter the mysterious DOS clause.. Being married, I'm sure you see the dilemma their.. How do we overcome this?

3. Can we use HELOC funding for a down payment? Most loan apps ask where the down payment is coming from..

Hopefully this enough details for you all to provide solid advise. If not, fire away!

Thanks in advance BP family.