How am I supposed to buy a 2nd house!

[Shawn Callan]

Am I missing something? I'm struggling to see how I can afford to get into a second house with my current DTI. I own a house that I am living in with a VA loan and want to buy a different home and move into that as my primary residence and rent out my first home. But when I quickly run the numbers it doesn't add up. I owe 400K on my current home and would be looking at 450K for a new primary. That's 850K worth of debt. If I could rent my home for $2,500 (I hear lenders could take 75% of that projected income?) plus my monthly W2 income I get $8,675 (2500 X .75 plus 6800). My current monthly mortgage payment plus projected future mortgage payment (2900+2900 = 5800). So I would have debts of $5800 divided by $8,675 gives me a DTI of 67%. I do have money for a down payment, but I fail to see how I could make this work? Is my math wrong or is there another better way to do this? Any thing helps!!

[Noah Wright]

Quote from @Shawn Callan:

Am I missing something? I'm struggling to see how I can afford to get into a second house with my current DTI. I own a house that I am living in with a VA loan and want to buy a different home and move into that as my primary residence and rent out my first home. But when I quickly run the numbers it doesn't add up. I owe 400K on my current home and would be looking at 450K for a new primary. That's 850K worth of debt. If I could rent my home for $2,500 (I hear lenders could take 75% of that projected income?) plus my monthly W2 income I get $8,675 (2500 X .75 plus 6800). My current monthly mortgage payment plus projected future mortgage payment (2900+2900 = 5800). So I would have debts of $5800 divided by $8,675 gives me a DTI of 67%. I do have money for a down payment, but I fail to see how I could make this work? Is my math wrong or is there another better way to do this? Any thing helps!!

We have private funding without DTI throttles --

[Nicholas L.]

@Noah Wright for a primary?  i'm skeptical

[Jake Baker]

@Shawn Callan

Lenders typically look for a DTI under 50% for conventional loans. One option is to pay down any existing debts (credit cards, car loans, etc.) to free up income capacity. Any reduction in non-mortgage debt can make a big difference in your overall DTI.

Since you mentioned having funds for a down payment, putting more down on your new purchase could reduce your new mortgage payment and lower your DTI. Alternatively, using part of those funds to pay your current mortgage might help create additional borrowing room.

[Shawn Callan]

[Mason Liu]

Just to take a step back...

You mentioned your monthly mortgage on your current primary is $2900/month, but you expect rents to only be $2500/month. That would be a -$400/month cash flow. That definitely won't help when it comes to trying to purchase a new property with a conventional investment loan in terms of DTI.

But yes, in general with every property you purchase with a conventional loan, it makes it harder to purchase another property with a conventional loan given the DTI restraints UNLESS you exponentially increase your income (preferably W2).

[Jay Hurst]

Quote from @Shawn Callan:

Am I missing something? I'm struggling to see how I can afford to get into a second house with my current DTI. I own a house that I am living in with a VA loan and want to buy a different home and move into that as my primary residence and rent out my first home. But when I quickly run the numbers it doesn't add up. I owe 400K on my current home and would be looking at 450K for a new primary. That's 850K worth of debt. If I could rent my home for $2,500 (I hear lenders could take 75% of that projected income?) plus my monthly W2 income I get $8,675 (2500 X .75 plus 6800). My current monthly mortgage payment plus projected future mortgage payment (2900+2900 = 5800). So I would have debts of $5800 divided by $8,675 gives me a DTI of 67%. I do have money for a down payment, but I fail to see how I could make this work? Is my math wrong or is there another better way to do this? Any thing helps!!

 Just trying to clarify, what is your W-2 monthly income?

[Denis Ponder]

Quote from @Jay Hurst:

Quote from @Shawn Callan:

Am I missing something? I'm struggling to see how I can afford to get into a second house with my current DTI. I own a house that I am living in with a VA loan and want to buy a different home and move into that as my primary residence and rent out my first home. But when I quickly run the numbers it doesn't add up. I owe 400K on my current home and would be looking at 450K for a new primary. That's 850K worth of debt. If I could rent my home for $2,500 (I hear lenders could take 75% of that projected income?) plus my monthly W2 income I get $8,675 (2500 X .75 plus 6800). My current monthly mortgage payment plus projected future mortgage payment (2900+2900 = 5800). So I would have debts of $5800 divided by $8,675 gives me a DTI of 67%. I do have money for a down payment, but I fail to see how I could make this work? Is my math wrong or is there another better way to do this? Any thing helps!!

 Just trying to clarify, what is your W-2 monthly income?

Looks to me like it's $6,800 based on the math in the parenthesis.

If that's the case, looks like OP bought a little too much house the first time around.  You might need to be patient and save up more money or look for ways to increase your W2.  It's going to take a little while to get there financially.  Can you house hack where you are currently to accelerate your savings?

[Shawn Callan]

Quote from @Denis Ponder:

Quote from @Jay Hurst:

Quote from @Shawn Callan:

Am I missing something? I'm struggling to see how I can afford to get into a second house with my current DTI. I own a house that I am living in with a VA loan and want to buy a different home and move into that as my primary residence and rent out my first home. But when I quickly run the numbers it doesn't add up. I owe 400K on my current home and would be looking at 450K for a new primary. That's 850K worth of debt. If I could rent my home for $2,500 (I hear lenders could take 75% of that projected income?) plus my monthly W2 income I get $8,675 (2500 X .75 plus 6800). My current monthly mortgage payment plus projected future mortgage payment (2900+2900 = 5800). So I would have debts of $5800 divided by $8,675 gives me a DTI of 67%. I do have money for a down payment, but I fail to see how I could make this work? Is my math wrong or is there another better way to do this? Any thing helps!!

 Just trying to clarify, what is your W-2 monthly income?

Looks to me like it's $6,800 based on the math in the parenthesis.

If that's the case, looks like OP bought a little too much house the first time around.  You might need to be patient and save up more money or look for ways to increase your W2.  It's going to take a little while to get there financially.  Can you house hack where you are currently to accelerate your savings?

Yes $6800 is my monthly income, I am in the military so my income does rise but not significantly. Here in WA I bought basically the cheapest 3/2 there was, I’m beginning to wonder if the price of houses here makes it that much more difficult to get into another one. I’m not giving up though and I really appreciate everyone’s input, it really does help 

[Chris Barrett]

Yeah interest rates currently make it really difficult, as houses are often cheaper to rent than to pay the mortgage + taxes on. You might be better off not trying to house hack into a whole new house and either look for a duplex where you can rent half of it out or just look for a project house that you can get a DSCR loan on.

[Denis Ponder]

Quote from @Shawn Callan:

Quote from @Denis Ponder:

Quote from @Jay Hurst:

Quote from @Shawn Callan:

Am I missing something? I'm struggling to see how I can afford to get into a second house with my current DTI. I own a house that I am living in with a VA loan and want to buy a different home and move into that as my primary residence and rent out my first home. But when I quickly run the numbers it doesn't add up. I owe 400K on my current home and would be looking at 450K for a new primary. That's 850K worth of debt. If I could rent my home for $2,500 (I hear lenders could take 75% of that projected income?) plus my monthly W2 income I get $8,675 (2500 X .75 plus 6800). My current monthly mortgage payment plus projected future mortgage payment (2900+2900 = 5800). So I would have debts of $5800 divided by $8,675 gives me a DTI of 67%. I do have money for a down payment, but I fail to see how I could make this work? Is my math wrong or is there another better way to do this? Any thing helps!!

 Just trying to clarify, what is your W-2 monthly income?

Looks to me like it's $6,800 based on the math in the parenthesis.

If that's the case, looks like OP bought a little too much house the first time around.  You might need to be patient and save up more money or look for ways to increase your W2.  It's going to take a little while to get there financially.  Can you house hack where you are currently to accelerate your savings?

Yes $6800 is my monthly income, I am in the military so my income does rise but not significantly. Here in WA I bought basically the cheapest 3/2 there was, I’m beginning to wonder if the price of houses here makes it that much more difficult to get into another one. I’m not giving up though and I really appreciate everyone’s input, it really does help 

Yeah, that does make it tough.

Primarily, thank you for your service!  Phenomenal sacrifice and much appreciated!

Keep working it and grinding it out.  The nice thing is your equity will likely grow quickly in the area.  So, while you might not be able to save up as quickly, the gain in net worth could very much be worth the wait.

[Jeremy H.]

So this is actually fairly straightforward... 

99% of houses don't make good rental properties - your original primary will not make a good rental. $2900 (mortgage payment) - $2500 (projected rent) = -$400 (monthly cashflow). Add in property manager, repairs/maintenance, CapEx, vacancy etc and you will be deep in the red. This would likely be a bad investment in your position.

I would personally plan to sell your primary and purchase a new primary. 

Take advantage of that VA loan again too - much better terms than going with a private lender/DSCR type loan.

You can always house hack, buy a multi family, do a trailer park and live in a trailer etc. You may even consider doing some budgeting and see if a smaller house or even (dare I say it?) renting makes sense...

[Sarah Brown]

There are a lot of lenders, which a lot of programs, that have a lot of different requirements.  I would work with a lender on your specific situation.  I have seen people be able to get similar deals done.  

[Michael Smythe]

@Shawn Callan your plan is high risk due to the amount of debt you're taking on and the negative cashflow.

What happens if you get a bad tenant and it takes you months to evict them and they trash the place on the way out?

Where will the money come from to cover your mortgage payments AND the needed rehab work?

If you decide to go this route, suggest you get a HELOC on your current primary before moving. Then be disciplined enough to NOT use it except in an emergency situation like above. Do NOT use it for your down payment on the new home.

You should also do some research to map out when rents will rise enough to cover the current negative cashflow. Typically, it's 3-5 years. Can your income support it that long?

If everything goes right, this would work out well in the long run for you due to rising rents and property values. 

You could also try to change your plans to find away to better position yourself. 

1) Find a fixer-upper and use the FHA 203(k) to finance the repairs in the purchase mortgage. You have to get contractor bids to qualify, but ten you can do the work yourself after closing and build sweat-equity.

2) Be very picky about the next property you buy and make a bunch of lowball offers to find a motivated seller, willing to sell under market. You may have to pay an agent to make all these lowball offers, otherwise they may get tired of you wasting their time.

3) What can you do to your current house to generate cashflow now or more in the future:
- Finish the basement as a separate unit? 
- Convert garage to ADU?
- Add ADU on top of garage?

Would not recommend investing remotely until you have some local property management experience. 

[Ko Kashiwagi]

Hi Shawn,

Don't quote me, but I'm pretty sure you deduct the rent (75%) you're getting from the liabilities (denominator) rather than adding to your income (nominator) IF it's an investment property. This should help your DTI a little bit.

For the purchase, you can also look into triplex and fourplexes and use those rent to help you out.

[Bryan Maddex]

Hey @Shawn Callan

I sometimes cringe when i see some replies to threads so lets clear up a few things. 

First, do NOT take a heloc out on your current home unless you are planning on living there for another year. Helocs, just like mortgages, have occupancy clauses that state you plan to live in the home for the next 12 months. Doing this and then moving out right away is called Occupancy Fraud, a type of mortgage fraud! 

Next, if you do another VA mortgage, VA allows you to take your lease and offset your mortgage payment. You do not have to take 75% of your lease! That is a conventional and FHA guideline, VA allows 100% of your lease to offset up to all of your mortgage payment. You cannot use rental income above your mortgage payment to help qualify for a larger mortgage, but you can utilize 100% of the lease income to offset so that should help you qualify for more of a mortgage.

VA allows you to have 2 VA mortgages. Your first mortgage uses up your Entitlement or Tier 1 Entitlement. You now can use Bonus Entitlement, or Tier 2 Entitlement.  This is based off of the conventional loan limit where you are buying. If you are buying in a standard loan limit area (most of the country), your current bonus entitlement is $766,550. Take your initial VA mortgage (lets say it is $410k) from $766,550 and you have $356,550 in bonus entitlement. If you are purchasing for $450k, you just have to put 25% of the difference down ($450,000 - $356,550 = $93,450 * .25 = $23,362 would be your down payment. 

Conventional loan would take $22,500 so going VA is a no brainer! Cheaper rate, no PMI, better underwriting for rental income. Down side, your 2nd usage of a VA mortgage will run you 3.3% on the VA Funding fee (but it is financed into the loan), unless you get any disability from VA.

As others stated, selling could be beneficial if you are going into negative cashflow. But, VA is the only "owner occupied" loan type that you can actually refinance after you have converted this to an investment property!  Depending on what your rate is, you may be able to lower your payment with a refi, even after you move out!  Also, rent typically can be increased every year. If you think this property is in an area that will see decent appreciation, I would try to rent it out for 3 years and then consider selling. 

Not giving tax advise, so check with your CPA, but I sold a rental after it was my primary for over 2 years and as long as it was considered my primary residence "2 of the last 5 years", I did not have to pay capital gains on my property sale up to the IRS limit. 

[Shawn Callan]

Quote from @Bryan Maddex:

Hey @Shawn Callan

I sometimes cringe when i see some replies to threads so lets clear up a few things. 

First, do NOT take a heloc out on your current home unless you are planning on living there for another year. Helocs, just like mortgages, have occupancy clauses that state you plan to live in the home for the next 12 months. Doing this and then moving out right away is called Occupancy Fraud, a type of mortgage fraud! 

Next, if you do another VA mortgage, VA allows you to take your lease and offset your mortgage payment. You do not have to take 75% of your lease! That is a conventional and FHA guideline, VA allows 100% of your lease to offset up to all of your mortgage payment. You cannot use rental income above your mortgage payment to help qualify for a larger mortgage, but you can utilize 100% of the lease income to offset so that should help you qualify for more of a mortgage.

VA allows you to have 2 VA mortgages. Your first mortgage uses up your Entitlement or Tier 1 Entitlement. You now can use Bonus Entitlement, or Tier 2 Entitlement.  This is based off of the conventional loan limit where you are buying. If you are buying in a standard loan limit area (most of the country), your current bonus entitlement is $766,550. Take your initial VA mortgage (lets say it is $410k) from $766,550 and you have $356,550 in bonus entitlement. If you are purchasing for $450k, you just have to put 25% of the difference down ($450,000 - $356,550 = $93,450 * .25 = $23,362 would be your down payment. 

Conventional loan would take $22,500 so going VA is a no brainer! Cheaper rate, no PMI, better underwriting for rental income. Down side, your 2nd usage of a VA mortgage will run you 3.3% on the VA Funding fee (but it is financed into the loan), unless you get any disability from VA.

As others stated, selling could be beneficial if you are going into negative cashflow. But, VA is the only "owner occupied" loan type that you can actually refinance after you have converted this to an investment property!  Depending on what your rate is, you may be able to lower your payment with a refi, even after you move out!  Also, rent typically can be increased every year. If you think this property is in an area that will see decent appreciation, I would try to rent it out for 3 years and then consider selling. 

Not giving tax advise, so check with your CPA, but I sold a rental after it was my primary for over 2 years and as long as it was considered my primary residence "2 of the last 5 years", I did not have to pay capital gains on my property sale up to the IRS limit. 

Thank you so much Bryan, this info was very helpful. I can now see how the those wide gaps in my plan/idea can get closer together and be possible

[Vivienne Affat]

Quote from @Shawn Callan:

Am I missing something? I'm struggling to see how I can afford to get into a second house with my current DTI. I own a house that I am living in with a VA loan and want to buy a different home and move into that as my primary residence and rent out my first home. But when I quickly run the numbers it doesn't add up. I owe 400K on my current home and would be looking at 450K for a new primary. That's 850K worth of debt. If I could rent my home for $2,500 (I hear lenders could take 75% of that projected income?) plus my monthly W2 income I get $8,675 (2500 X .75 plus 6800). My current monthly mortgage payment plus projected future mortgage payment (2900+2900 = 5800). So I would have debts of $5800 divided by $8,675 gives me a DTI of 67%. I do have money for a down payment, but I fail to see how I could make this work? Is my math wrong or is there another better way to do this? Any thing helps!!

It looks like you're on the right track with your math, but a couple things could help. First, keep in mind that some lenders might let you use more than 75% of the rental income, especially if you have a solid rental history or property management in place. Also, your DTI can sometimes be more flexible depending on your credit score or reserves, so it's worth asking the lender about that.

If your DTI is still too high, try looking at ways to lower your monthly payments or increase your rental income. Could you get a higher rent for your current home? Or maybe consider putting more down on the new place to lower the mortgage? You could also explore other loan programs that work better with higher DTIs, or even pay down some of your current debt. It might take some adjustments, but you're not far off from making this work!