Converting our primary residence to income property & mortgage for new purchase

[Donnie Britton]

We are in the market for a step up SFR, currently in a townhome. Our goal is to convert our current home to a rental give a mortgage for the acquisition of the new property.

The financing institution will accept 75% of the rental amount in DTI calculations. However, we must have a lease in place and take possession of the security deposit in order to do so.

Any recommendation on how to engage a potential tenant to sign a lease, and pay the security deposit when the unit may not be available for occupancy until several months down the road? 

Thank you in advance for your time and consideration.

Donnie

[Doug Smith]

I was a banker for more than a decade, but I've been lending outside of the banking world for a long time. Banks calculate Debt Service Coverage Ratios differently than "DSCR Lenders". DSCR lenders calculate their DSCR = Rent / PITI + HOA Cost. Banks add in maintenance costs, 5%-10% for management fees, and they will deduct anywhere from 10% to 25% for "vacancy". They also usually require DSCRs of over 1.25X where DSCRs usually only look for 1.0X...some will even let you go lower if you have experience. The kicker is that DSCR lenders have a Fannie form 1007 added to the appraisal to have the appraiser come up with a rent figure and they use that as the rent...without a lease in place...with no vacancy factor. Many times, banks are not the right place to get a rental loan. Sorry to interject so much that you didn't ask, but I would also look into some of the non-bank lenders that do DSCR loans. Good luck to you.