has anyone bought a 2nd house, while renting out the first?

DH and I currently live in a co-op but want to buy a house soon. The problem is that we don't want to sell the apt because we don't have equity and would end up losing money on it.

I just spoke with a bank who said that until I get a renters agreement, I can't consider the apt as a rental property and that would potentially hurt our getting approved for a house-loan.

As i mentioned, DH and I are living in our apartment so it's not like we can start renting it out now or we'd be homeless. So how exactly do we get approved for the house mortgage and still keep this apartment?

TIA and sorry this was a bit long.

Re: has anyone bought a 2nd house, while renting out the first?

if you can't afford both mortgages I would not advise it. Our sale of our co op fell through after we were in contract for our new house. We rented it for a year but now we want to sell it and it is going to have to be empty until we sell it so we are paying both mortgages.

Re: has anyone bought a 2nd house, while renting out the first?

We were in the process of doing this but the deal fell thru because of the seller wound up going into foreclosure and having massive liens on the house. It was last year so I don't remember the exact details. We had gotten approved but it was contingent on our first house being rented out for a specific amount by a certain date. There were a bunch of other things we had to have as well. I believe we needed to have 6 mos worth of mortgage payments for both homes in addition to our down payment and closing costs. And our 1st home had to appraise at a certain value. Hth!

Re: has anyone bought a 2nd house, while renting out the first?

Re: has anyone bought a 2nd house, while renting out the first?

I would talk to some other lenders and get more information --

I have recently had a few customers explore this with a mortgage guy I know/trust, and I believe he said that if you don't have any equity in the property, the rental income wouldn't count as income in the calculation of debt-to-income ratio. He said it would be a "mitigating factor," so that if a person was on the cusp of qualifying to buy another home and wasn't going to sell their current home, the fact that the current home would be rented could push the person over the edge to get them approved for a mortgage. So basically, it's a helpful fact that the underwriter will consider, but it's not looked at as income (again, IF there's zero equity.... they owe more than the first home is worth). I may have misunderstood him -- I don't know the nitty-gritty of all the mortgage stuff --but I "think" this is what he said.

Also, different banks have different rules and criteria, so you might find that what you can't do with one lender, you can do with another.

Re: has anyone bought a 2nd house, while renting out the first?

We just went through this last year. We owe more than the house is worth, as well - we will very likely have to bring money to the table when we sell house #1 - and this did affect things.... I think the house wasn't really considered rental property b/c of this, but don't quote me on that one!

That being said, we had to prove that we could cover BOTH mortgages AND have a 6 month cushion in the bank for both homes. We also put about 25% down on house #2, so it was a pricy issue.

In the end I'm really glad that we crunched the numbers since we haven't really had a renter for most of the time.... (My brother lives in house #1, but rarely pays rent and when he does it doesn't cover our mortgage - I'm stupid and shouldn't have let him live there at all....). I CANNOT wait to sell house #1. But there are other family issues involved in that.

If you can, sell your first property - rentals are SUCH a headache. If you know the rental market is good in your area, that's a different story. If you want my mortgage broker's contact info (he was FANTASTIC!), let me know. Good luck!

Re: has anyone bought a 2nd house, while renting out the first?

We rent our co-op, have been for about 4 years now. We had a buyer when we bought our house but they fell through and we had to rent it. Our situation is different though- this was in 2007 when mortgages were easier to get and we have all our equity in the co-op. Our rental market is great, we're on our 2nd tenant and haven't had any issues (except for having the decrease rent)

Re: has anyone bought a 2nd house, while renting out the first?

Thanks everyone.

I guess DH and I will try speaking with some additional banks and see what they say. Hopefully they give us a decent preapproval number.

Re: has anyone bought a 2nd house, while renting out the first?

There's a few thing syou need to consider.

-Can you carry both mortgages? The monthly payments (including Principal, interest, tax & insurance and maintenance) plus any other monthly debt on your credit report is going to have to be under 45% of your gross monthly income. You'll need to show you have 6 months worth of payments in the bank left after the closing for the new place and at least 2 months (maybe 6) for the co-op.

- Mortgage rates on 2nd homes are higher than if you buy a primary home.

- You may not be able to use the income from the rent to off-set the debt on the co-op if you don't have a history of managing a rental property (not sure if that applies on a co-op). they will most likely want to do an appriasal of the co-op (at your cost) to see what it's worth and what the income potential is.

Those are the mortgage factors.

You also want to think about personally- what will happen if you can't rent the co-op? If your renter leaves unexpectedly? Will you be okay financially paying for both places.

Re: has anyone bought a 2nd house, while renting out the first?

All great points!

After doing the math, I believe we can afford both mortgages and still have enough for other bills. It might be a bit tight, but definitely not impossible.

I just got off the phone with a loan officer who said there's a new law from about a year or two ago where, unless you have at least 2 years worth of renting experience (whose income appears on your taxes), you can't say that the original apt will be a rental property. That means that there's no way to count my assumed income from the apt for pre-approval purposes.

So i'm soooo torn over what to do now. We're actually in the process of refinancing the apartment. Now i'm not sure if i should cancel that and just try to sell it

Thank you again for the tips, advice, hints and answers

Re: has anyone bought a 2nd house, while renting out the first?

We were going to rent out our coop. We couldn't use the rent as income for some reason, which was ok for us. our coop board forced us to get a letter from the mortgage company saying they know we are renting it out. That was fine too. Problem was, now that coop was not primary residence , mortgage company was going to make us refi at a higher rate

We ended up selling our coop after we had already moved into our house. It was the boards fault for making us go back to the mortgage company. Wells Fargo basically said why are you telling us this, now we have no choice but to have you refi.
Total nightmare !

Message edited 3/9/2012 3:38:04 PM.

Re: has anyone bought a 2nd house, while renting out the first?

Posted by maybesoon

Problem was, now that coop was not primary residence , mortgage company was going to make us refi at a higher rate

Re: has anyone bought a 2nd house, while renting out the first?

Posted by BBin2012

Posted by maybesoon

Problem was, now that coop was not primary residence , mortgage company was going to make us refi at a higher rate

Same thing happened to us...we own a co-op in the city and instead of buying another house we are renting a larger place. However, we are trying to buy investment property and are having a tough time getting the loans approved since it's commercial property and we're carrying the other place in the city. It's frustrating. But if the refi works in your favor even with the higher rate they're giving, I would still do it...we're trying the same so that the rental is actually profitable.

Good luck!

Re: has anyone bought a 2nd house, while renting out the first?

You should consider all the above mentioned items. I'm not sure of the new law or what not, but its not hard to have a signed rental agreement.... a cousen a brother whoever. assuming you're going to rent it.

the other thing I'd mention is, have you applied and found out how much you can borrow? I bought my house while I owned my last house. I was surprised that they would lend me on the second while I still had the first. I wasn't counting rental income etc. the only concern was that they ewre questioning on whether I was making the new house my primary residence having the loans outstanding wasn't a problem.

the only caviet was that they had a high amount of required savings for covering the old house mortgage and new house mortgage.

It really comes down to how streached are you with to mortgage payments and savings.