buying another primary residence

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buying another primary residence

Raky Patel
Rental Property Investor · Houston, TX · Member since 2013 · 46 posts · 7 votes

hi all, this is my first post here but i have been lurking for a couple months now. i must say this is a great resource and thanks to all that share their experiences. i have some questions regarding buying another primary residence. here are some facts about my situation:

- I just got married last October and my wife and I each had our own house.
- I have a home in my name that has been rented out (less than a year) and live in my wife's house.
- The plan is to rent out my wife's house and buy a new primary residence leaving us with two rentals.
- We do not want to pull out any equity from either house and each has a rate lower than 4.5%.
- This is the first house we would be buying with joint ownership.
- Our debt to income ratio is around 35% if you factor in both of our mortgages.

Questions:
1. How do mortgage lenders look at this situation? I assume they will not count any rental income that has been received as the properties would not have been rented for 2 years however would the mortgage still effect my debt ratio if I was breaking even from the rental (I am making an annualized return of around 10%)?

2. I have read that you must have the equivalent of 6 months rent in reserves (not a problem) when looking for a new property if you are keeping one as a rental and it has not been rented for 2 years. Does this mean that this property would not be that heavily considered when determining whether or not we can get another mortgage?

3. Do the funds in question 2 have to be in a savings account or can they just be in an investment account or retirement account?

4. How much down can we expect to be required to put down if this was our 3rd mortgage and we were going conventional - 10% or 20%? Also, what percent of our income can we expect to be qualified for in monthly payments given the facts above?

Thanks,
Raky

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David Krulac
Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes
13y

Raky Patel

I have another angle for you.

1. You both have mortgages on your individual former residences, these mortgages are in your individual names.

2. FNMA & Freddie and all the overlays will limit you to either 4 mortgages or maybe 4+1 mortgages.

3. If your to be acquired new residence is owned and mortgages in BOTH of you names, it will mean that you and your wife will both have 2 mortgages, even though the total is only 3. (Wierd math 2 + 2 = 3) But that's how Fannie etc. work.

4. If your long range plan is to buy other real estate after the new residence, then you might want to consider getting the new mrtgage in only one name.

5. Given current rules you and your spouse can acquire 8 different properties if each is only mortgaged in a single name versus joint names.

6. Back in the day, like 5 years ago, the FNMA limit was 10 mortgages and spouces could then potentially acquire 20 properties all will FNMA conforming mortgages, oh those were the days!

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  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    13y

    Welcome to BP.

    The property leased can be considered to offset you loan, 75% of income. The full amount of the second property that is not leased will count against you, unless you get a lease signed prior to closing, kinda hard I know while living there. Some will accept 1 year leased and on tax returns.

    Your LTV is not an issue with owner occupied loans, but they will probably ask you a dozen times and have you sign a owner occupied statement, so, 90% is okay, if you qualify with 100% of the expenses of one home and 25% of the other and all of the new mortgage.

    Reserves vary as to type of loan but owner occupied is generally 3 months reserves.

    Funds need to be on deposit for 3 months prior to the contract generally or they need to see where funds came from. Funds can be in any deposit accout to be considered for funds to close and reserves.

    If your ratios are less than 28% for other debts and 36/38% you should be fine, there is leeway with ratios, less on one side they can approve a higher % on the other side. If you are at 80% and stay away from PMI, the ratios have a better fudge factor.

    You may have better luck at a bank that can hold the loan for a period/1 year and then sell it, as they can sell as a seasoned loan if ratios are tighter. :)

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  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    13y

    Sorry, but I'm going to have to disagree with Bill Gulley a little. Becuase you've only had the one rental less than a year, any rental income will be ignored by lenders. The full amount of all three mortgages will go into the debt side of the calculation and the income will be ignored. If you had two years experience in landlording, the situation would be different. They would instead use the actuals from your tax return. A positive net income from the rentals would go into the income side, negative into the debt.

    Six months PITI reserves is the usually rule of thumb, plus two months for each of the rentals. That's different than the down payment. I've been told you can use qualified plan money for these reserves, but the amount will be discounted by about 40% to account for taxes and penalties.

    Down payment should be visible in your bank accounts for the last three months, as Bill says. Otherwise, you'll have to explain its source.

    I discussed a similar situation with a broker recently. For OO, you should be able to get a 10% down loan, but with PMI. 20% down to avoid PMI.

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  • Oliver Trojahn
    Kansas City, MO · Member since 2008 · 143 posts · 41 votes
    13y

    I am in a similar situation but just have one personal residence and looking to purchase another while renting my existing one out. My lender told me if I have 25% equity in my personal residence we can count the rent towards your next purchase, hence, eliminating the current payment. This is allowed with no land lording experience. This rule does not help me as I only have 21% equity. I have to qualify for both mortgages at this point. I have land lording experience etc so my plan is to purchase a rehabber in my target area with a portfolio loan. In three months (with primary being rented out) I can refinance into a conventional 30. Most likely with little out of pocket.

    The three months will work for me as I have three years land lording experience and at that point they will accept three months bank statements showing rent collected and a lease.

    If you have 25% equity in both houses you may be able to count your rental income. This is what I have been told by my guy. You will also have to pay for two appraisals to prove the 25% equity.

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  • Raky Patel
    OP
    Rental Property Investor · Houston, TX · Member since 2013 · 46 posts · 7 votes
    13y

    Thanks for your insight Bill!

    0Reply
  • Raky Patel
    OP
    Rental Property Investor · Houston, TX · Member since 2013 · 46 posts · 7 votes
    13y

    Thanks Jon and Andrew!

    0Reply
  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    13y

    Well, I was summoned by the mention, what do I say,I just stand by what I said.

    Jon may be totally correct for Co.

    But I'm pretty sure it is 3 months reserves for fannie in Texas, my son just did an OO purchase and I assisted him in the deal and spoke to the bank.

    There is no discounting to reserves, it's the amount of principal, interest, taxes and insuarance X 3 for owner occupied. 6 if buying rental, non-owner occupied.

    The down payment on account is not discounted either, it's either there or it's not. Now, if funds come from a qualified tax plan, IRA, they deduct the tax penalty for the withdrawl to compute reserves.

    :)

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  • Steve Babiak
    Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    13y

    Bill Gulley the discount that Jon Holdman was referring to is if the "reserves" are in an IRA, where to get at the money, the sum in the IRA will be discounted to account for income taxes and penalties for the early withdrawal.

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  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    13y

    You are probably right, Bill. I'm thinking of rentals. AFAIK, the guidelines for rentals are 6 months PITIA for the new one plus 2 for existing ones for properties 1-4. Properties 5-10 require six months PITIA for all properties. Perhaps these have changed since I last tracked them down.

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  • Raky Patel
    OP
    Rental Property Investor · Houston, TX · Member since 2013 · 46 posts · 7 votes
    13y

    Guys my house in question (my rental) came up again for lease as the tenants signed a 3 month term but paid me a $200 premium per month. Originally they were going to renew but need to move as they found a house to buy. Good news is that my property manager just emailed me and said he got 3 applications (been on the market for 2 weeks since we got notice). 2 of the 3 applications are for a 1 year term and the third application is for a 2 year term. The 2 year term needs to move in April 15 while the others can move in by the end of the month. I think the 2 year term is the way to go provided everything pans out. Any reason not to take the longer lease? Also my main question is that when my wife and I look to buy a new house in December will the bank consider the 2 year contract as an offset to my loan on that property even though I have not had it rented out for a long term previously and my taxes will not reflect a long term rental? I would hope so if there is a 2 year contract with a strict termination clause and consistent rental payments from the start of the lease.

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  • David Krulac
    Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes
    13y

    Raky Patel

    I have another angle for you.

    1. You both have mortgages on your individual former residences, these mortgages are in your individual names.

    2. FNMA & Freddie and all the overlays will limit you to either 4 mortgages or maybe 4+1 mortgages.

    3. If your to be acquired new residence is owned and mortgages in BOTH of you names, it will mean that you and your wife will both have 2 mortgages, even though the total is only 3. (Wierd math 2 + 2 = 3) But that's how Fannie etc. work.

    4. If your long range plan is to buy other real estate after the new residence, then you might want to consider getting the new mrtgage in only one name.

    5. Given current rules you and your spouse can acquire 8 different properties if each is only mortgaged in a single name versus joint names.

    6. Back in the day, like 5 years ago, the FNMA limit was 10 mortgages and spouces could then potentially acquire 20 properties all will FNMA conforming mortgages, oh those were the days!

    1Reply
  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    13y

    I only do month to month leases. Longer term leases are more binding on the landlord than the tenant. If they need to leave, they will. And, for me, have. With a month to month, I can terminate at any time with no reason. I don't know if the two year lease will make any difference. That two year guideline was in Freddie Mac guidelines, the last time I looked.

    Fannie Mae will still let you go up to 10. I spoke (ok, e-mailed) with a broker I've used in the past and he assured me he could go up to 10.

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  • Raky Patel
    OP
    Rental Property Investor · Houston, TX · Member since 2013 · 46 posts · 7 votes
    13y

    David Krulac that is a great idea however I think we need to factor in both of our incomes because of the rule of 36. Doing a quick calculation on the gross annual income based on the rule of 28 we are more than ok. On the gross annual income based on the rule of 36 we are off by $40,000 based on a $360,000 mortgage factoring in all our other liabilities and including both our mortgages. This is crazy to me because for the sake of numbers we make enough to cover all our liabilities, both mortgages + a 3rd mortgage (with all associated costs) and still have 40% of our gross monthly income left over or 20% after tax and max 401k contributions.

    Jon Holdman thanks for your opinion. Quick question for you - my mortgage on the property that is rented is FHA. When I got it it was owner occupied since 2008. Does it make a difference if the mortgage is FHA vs. Fannie or Freddie?

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  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    13y

    AFAIK, no. When you're applying for a new conventional loan, they look at the current number of mortgaged properties. Doesn't matter what kind of loan it is. Or, if you have two loans on one property. Its the number of mortgaged properties that matters.

    That said, this is a conversation to have with brokers and lenders. These rules are fluid. Lenders often have their own set of "overlays" that tighten up FM & FM's rules.

    0Reply
  • Raky Patel
    OP
    Rental Property Investor · Houston, TX · Member since 2013 · 46 posts · 7 votes
    13y

    Jon Holdman Thank you so much for your help. I really appreciate all your responses and I can see you are a great asset to this community!

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