Ask a Lender: Joel Schaub, Guaranteed Rate

Q: I am working with a buyer who wants to place an offer on a home in Oak Park, but I am not sure we will be able to sell his South Loop condo based on current sales in his building. We are now considering a hold and rent strategy. Can he still qualify for a mortgage on a new property and are there any special rules for using rental income that I should be aware of?

A: Agents and buyers have been asking me this kind of question more and more in the last two years. These are the clients I fondly refer to as the “inadvertent landlords.” They bought a place in ‘05, ‘06 or ‘07, and now they are a little older, a little wiser and, hopefully, a little wealthier. Now, instead of staying in their South Loop condo or that hip Bucktown loft, they are looking at a larger, possibly suburban home, one with a big yard or in a better school district. As an agent, you share with the buyer that this listing is priced far below what the seller paid just a few years back and how it’s definitely worth placing an offer on. But the question remains: will they be able to get an approval to carry this mortgage as well as keep the soon-to-be rented condo?

The good news is that, yes, banks are still lending to buyers who might be looking at a “move-up” home, even if they are forced to keep and rent out a condo rather than sell. If the client can carry the payments of both mortgages on their own without the need of rental income, then a pre-approval letter will soon follow. More often than not, the buyer needs the rental income to offset the payments of the current property to keep the debt ratio acceptable to the lender. Typically, banks want to see a two-year landlord history to allow rents to be used for qualification, but if the borrower can meet the three following requirements, banks will consider new rents as income even if the borrowers have never rented a property before.

  1. Provide a signed lease for the condo they intend to rent.
  2. Furnish a copy of the security deposit to ensure a bona fide lease is in place.
  3. Document via appraisal the condo loan to value is no greater than 70 percent.

This final requirement is typically why most borrowers I speak with are seeking options to qualify without using new rental income. Buyers who are putting 20 percent or more down on the new property will have more flexibility and likelihood of a smooth approval; even with as little as 5 percent down, many buyers use the rent and hold strategy and are approved for a mortgage on the new home. Income, credit score and other debts all factor into the equation, so it is critical your buyer speak with his lender and investigate how much they can borrow.

Q: As an agent here in Chicago, what is the biggest obstacle my clients will face in 2012?

A: Property values remain at depressed levels throughout the area, which will continue to provide challenges for your new sellers. Although the Chicago MSA has not faced the same decreases as Florida, Arizona or Michigan, values are still soft. The forecasts for 2012 are promising nonetheless. New housing sales are expected to increase 23 percent according to National Association of Realtors Chief Economist Lawrence Yun. This increase is spurred in part by the continued record low interest rates available to strong buyers and by a large inventory choice.
If you are helping a seller in this market, setting the right expectations are key. Often, sellers will need to bring cash to the table to close a transaction, which will impact the listing price and any subsequent price reductions. If you are helping a buyer in this market, make sure they have a good lender and a pre-approval letter for an amount they are very comfortable with spending. Buyer’s options will be plentiful in 2012 as they will have the opportunity to acquire properties at sizable discounts relative to their selling prices just a few years back.

Q: Can my buyer still get a mortgage when the appraisal comes in lower than the contract price?

A: Yes. I just had this happen with a client of mine in September. A great Northside three-unit building went on the market for $749,000, and my client quickly negotiated with the seller and signed a contact at $690,000. Similar properties were selling in excess of $1 million just a few years back, so he was thrilled. Two appraisals later, the highest value that was supported was only $670,000. This was a full $20,000 lower than he agreed to pay, but the seller would not budge; given the pristine nature of this building and location, he still wanted the property. He approached me and said he would put the 25 percent down and pay the difference in the values, which was more than within lending guidelines. Banks will lend on the appraised value or purchase price, whichever is lower. A buyer may still purchase a property for the agreed-upon price, but any amount over the appraised value must be paid for above and beyond the down payment. Often, a buyer can negotiate with the seller when appraisals are coming in low, and if they cannot agree, the deal can still move forward if the borrower knows this tip. My advice to agents is make sure your buyers are working closely with their lender to ensure that many of these often overlooked options available for this kind of buyer are explored.

Joel Schaub has been with Guaranteed Rate since August 2005. He is a member of Guaranteed Rate’s President’s Club and his closings have exceeded $100 million over the last three years. He specializes in providing low to no closing cost options for both new buyers and those who are refinancing. Joel can be reached by phone at 773.654.2049 and by email at joel.schaub@guaranteedrate.com.

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