When considering purchasing another home, you often assume you must sell your current home. This is not always the case. If you are interested in keeping your existing home when moving on to the next one, let’s review and understand what it entails and the actions you might need to take to allow you to keep your home. It is never too soon to review your options, as some actions will require time to implement, such as debt consolidation or improving your credit score. Follow the 7 steps to decide what is the best solution for you.
- Renting your current home
If you have a mortgage or recently refinanced your loan with the benefits of Primary Residence, you are expected to live in your home for at least twelve months. Are there any other legal restrictions limiting you from renting your home? Some Homeowners Association (HOA) bylaws can forbid you from renting your home, or zoning limitations will not allow short-term rentals.
- Current home’s equity
Home equity is the home’s current market value, less any liens attached to the house. You need to know the home equity in a cash amount and the home’s liens as a percentage of your home value. Knowing the numbers will allow you to know your options.
Two important possible actions are derived from knowing the Loan-to-Value (LTV).
Having a conventional loan, if your LTV is under 80%, you should no longer pay Private Mortgage Insurance (PMI), which is required if you originally paid less than a 20% down payment. The lender will continue charging you the PMI, calculating your LTV, and using the home value on the loan’s documents, not the current market value. If you are considering keeping your home, a lower monthly payment can benefit you.
The LTV will also allow you to plan if you want to refinance and cash out on your home equity, consolidate debt, have cash for the down payment of your next home, or other reasons. The VA loans have higher cash-out options limits than FHA and Conventional loans. What is your LTV?
- Current home income and expenses
Will the future income cover your costs if you keep your home? Do the math, check the rent in your area for similar homes, comparing size and condition. Remember that sometimes there will be no income when you have tenants’ turnaround. When calculating the expenses, remember to include in addition to the monthly costs of the mortgage, insurance, taxes, and HOA, if applicable, periodical service to mechanics such as AC, irrigation system, or others. You also should add contingencies for repairs and the cost of professional management if you plan to hire one. The result will help you decide if this is what you want. Is there a surplus? Do you need to add money monthly? There is no right and wrong answer here. Is this aligned with your plans, is this a financially feasible plan, and what is your comfort level? Your rent income might cover your expenses, or you might need to pay out of pocket for some of the costs. Adding a certain monthly amount might be convenient for you, as while you do this, your debt is being paid down, and the home appreciates over time. For others, adding money monthly can be a deal breaker. Do your math.
- New home price range
By deciding the price range of your new home, you will know how much money you will need for the down payment and estimate the associated costs. You can also calculate the new monthly mortgage payment.
How much money do you need to prepare for the move? Some mortgages will require a 3% downpayment, and others, such as the VA, will require no money down.
Do you have the money? Do you need to save for the down payment, or can you do a cash-out refinance with your current home to have the money in the future?
- Qualifying for the new home’s mortgage
You can feel comfortable with the amount needed to buy your new home, but be aware that to qualify for the new mortgage, the income and expenses will include the two houses. Your expenses will include the current and future mortgage, and your income will include your current and future rental income if the lender accepts a signed lease as proof of income.
Knowing the qualification criteria will help you prepare in advance. In addition to a good credit score, credit report, and qualified income, I emphasize the impact of the Debt-to-Income (DTI) percentage. You do not qualify based on the amount of income but rather the percentage of all your minimum monthly payments of your debts, divided by your gross income. Each mortgage program has other requirements that can vary based on your credit score. A car loan can impact your eligibility for a mortgage. The Lender calculates all the minimum monthly payments on your credit report and adds the taxes and home insurance if you do not escrow them. Some Lenders will accept the future rent income if you provide a signed contract, often calculating 75% of the revenue, to offset vacancies. Other lenders will accept the rent income based on the information in your income taxes on Schedule E. If your current home is not rented when closing on the new home, your debt will include the two mortgages, and the debt-to-income percentage will be higher than if you had the rental income. Check with your Mortgage Loan Officer what is their criteria for rental income.
Some mortgages, such as the FHA, will allow a higher DTI, up to 57% in some cases, and others will allow a much lower DTI.
Compare the mortgage programs. If you choose a mortgage with a low down payment as FHA or Conventional, it will require a monthly payment of mortgage insurance. Even though it is not your ideal terms, after receiving the rent income, you can consider refinancing your mortgage for better terms. If this is the case, it is important to consider the cost of the loan and the requirements to refinance before taking action. Consult your Mortgage Loan Officer.
- Debt-to Income calculations
To begin with, ensure that the debt calculated is actually the debt you are paying. For example, if you co-signed a loan for a friend or a family member, that debt shows in your credit report as your debt, even though someone else is paying it. If you can prove that someone else is paying the debt, for example, by providing 12 months of bank statements of the other person, proving you are not on the account that pays the debt, the lender can remove this liability from your DTI calculation. If you pay your credit card in full every month, when the lender asks for the credit report, he will see the current credit card debt with the minimum payment amount, so share with your lender that the credit cards are paid in full monthly, and the lender can mark that liability as paid down. You will need to provide proof of this.
You can ask the Credit Bureaus for a copy of your credit reports, see that everything is accurate, and estimate your monthly debt obligations. If the debt percentage is high, is there any debt that can be paid off? Is it convenient for you to do debt consolidation, or can this debt percentage qualify for a specific mortgage program that allows a higher debt ratio?
Remember, all this is to put you in a better financial position. Assure you can afford the transition and new payments.
- Do you want to be a landlord?
You have checked if you can afford to keep your home. If you can, balance the advantages and challenges to make the decision that is right for you. Keeping your home will provide you with valuable financial benefits while you can have unexpected expenses. Balancing it all, what path allows you to reach your financial goals better, and what option are you more comfortable with? Make the decision that is best for you.