Fork in the road- Debt-to-income

[JAMES Coleman]

Hello all,

My wife and I are at a fork in the road and need some guidance. For the sake of a little background, we bought our first home two months shy of two years ago and have fully renovated it. We bought the house for $94k and believe we can sell it for $150k. After it’s all said and done, we think we can walk with approximately $35k net.

Choices, choices….

1. We could sell the house, buy another undervalued house and flip it again.
2. We could rent the house (the rental market is great here and I think we could cash flow, albeit by just a little bit.

Here is where I need some guidance. I’m very unfamiliar with real estate financing and I’m frankly not sure what our options are. My wife is a stay at home mom and our household income is slightly less than $40k per year (we live in a small home, most homes cost $60k or so).

In terms of debt to income ratio, lets say we rent out our current come, have it under a signed year long lease that will safely make our mortgage payment and a little more. Will a normal bank allow us to qualify for another home in which we will live in? In other words, will they count our rental income for the sake of our debt to income ratio?

Furthermore, if we bought a duplex, lived in one side and rented the other, would that still count under the rules for buying a primary residence or would that count as an investment property?

I appreciate the feedback from BP members, I have spent many hours perusing the site!

Jim

[Bill Gulley]

James, sorry to get here so late, IMO:

1. Talk to the lenders in your area, you'll find that portfolio loans (bank held not sold) may differ a great deal from what has been mentioned here.

2. In my area a regional bank will count 75% of rental income on a lease from a property you moved out of to acquire another property. You do not need to have prior leasing experience.

3. There is also no equity requirement, so long as there is a positive cash flow at the 75% level.

4. You can't do just what ever you like in seller financing. Each state will have financing laws and you'll need to check ( or ask a mortgage broker) what options you have in connection with a new loan for your buyer, or a Realtor (better yet, an attorney) about any installment agreements. Seller financing is an excellant option and can be accomplished safely compared to many other investments. Alot has been written here on seller financing, search it.

5. Income from rentals in a duplex or other single family (one to four) may be counted depending on the lender.

6. Fannie Mae sets underwriting guidelines for secondary market loans. While lenders adopt such guidelines, they can certainly vary in different instances. The only real rule is that lenders follow prudent lending practices and if there is a good reason to allow something different, then that is up to that lender. Fannie Mae is slightly different than Freddie Mac, then there is FHA, and USDA is different again, so there are no set standards for all lenders per se. Many of the initial underwriting rules go out the window after a loan is seasoned, kept on the books by the lender, and they will take on a different flavor to be sold in the secondary market or to affiliate lenders, but there are generally accepted requirements. For example, 80% LTV will be the maximun loan on a non-owner occupied loan as anything above that requires private mortgage insurance. But, you could get a loan equal to 110% of your purchase if you had a CD to pledge to reduce the risks to what a lender accepted for a portfolio loan.

Best thing to do is to talk to the lenders in your area and see what they will do. Don't use a hard money lender at all in your position. Check out Credit Unions as well! When you ask about lending term on BP, you'll get various opinions and IMO, they are based on the experiences of investors and loan originators in a particular market. What BoA does in St. Louis can be different than what is done in Oakland, Ca. (and is!)

Good luck