Although everybody’s situation is unique, there are some instances where homebuyers are able to keep their current primary residence and purchase another home to live in.
There are a variety of reasons as to why homeowners would do this. Perhaps they are outgrowing their current house or have been forced to relocate due to a job transfer. Or because of the market conditions that they are faced with, they may make the decision to hold off on selling at the present time.
So, do they have to sell?
Yes. No. Maybe. It depends. Welcome to the wonderful industry of mortgage lending; only in this industry can one simple question elicit four answers…and all of them be right.
If your clients are in a financial situation where they are qualified to afford both their current residence and the new proposed payment on their new house, and they have significant reserve funds (six months of BOTH mortgage payments), then they are good to go. Just keep in mind that when they have two houses, they have the expense of two houses. Everything from mortgage payments to maintenance to unexpected repairs have to be factored into their budget and their decision.
What if they rent it?
This scenario presents the “maybe” and the “it depends” answers to the question. Let’s say that your clients are not quite mortgage-qualified to carry both of the mortgages. Many people will then find that it is necessary to rent their current home to offset that mortgage payment. They then can qualify just on the payment on the new house. This is the Reader’s Digest version of it though.
Your lender will only count 75 percent of the monthly rent your clients are proposing to receive. So if your clients are going to receive $1000 a month in rent and their current payment is $1500, your lender is going to “count” a $750 monthly debt against your clients, and this may effect them qualifying for the new home. This will all depend on what their current mortgage payment is and how much they plan on collecting in rent.
The other mundane detail that can present a huge hurdle is the reserve requirement and equity that ratio lenders have. If your clients are going to rent out their current home, they will need to have at least 30 percent equity in order to offset their payment with the proposed rent they will receive. Without that hefty amount of equity, they will have to afford BOTH mortgage payments.
They will also need some significant cash in the bank. Lenders will still require six months’ reserves on the old property AND six months’ reserves on the new property. If they have a $1500 payment on their old house and are buying a home with a $2000 monthly payment, they will need over $21,000 in the bank. Did I mention that is in addition to their down payment on the new house? And remember, they have to meet both requirements.
What if they can’t afford both payments?
This is simple and requires no math at all. If your clients are in that situation, then they will have to sell their current home before buying a new one. But be sure to factor in any real estate commissions and other seller-related real estate fees that would influence the clients’ down payment on their next home.
As you can tell, it is imperative that you work with a lender that you trust and is on top of the numerous guideline changes that seem to happen on a daily basis. These scenarios may also help you with setting your clients expectations when you first meet with them. Nobody wants to fall in love with a house and then be told it’s not going to happen. My advice? If you have a client that already owns a home and they want to know their options get them in touch with a lender as soon as possible so everyone is on the same page.
Kevin Lanham, a loan officer and FHA specialist at Pacor Mortgage Corp, can be reached at: