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Rental income to get a seond mortgage

How long do you have to show rental income for before you can qualify for a second mortgage?  I am also wondering how you would go about getting rid of paying mortgage insurance.  Thanks!
  • July 28 - Denver
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Answers (5)

Everyone gave good answers. I might add that if you are looking for a VA loan you don't need to have any rental history to count it, just a signed lease agreement.
  • July 29
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Profile picture for CA Direct Lending
If you don't have 30% equity and a history of rental income, we have a lender who does not require either for you to use the new rent to help you qualify for a new purchase. 
  • July 29
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Profile picture for GMerino
When departing your current residence and looking to convert to an invesmtnet property:

The norm is 75% of gross rental income as stated on the lease as evidence of rental income or to offset the payment if the following conditions are met:

-  There must be at least 30% equty in the property and you can document this by an exterior only inspection date no more than 60 days from the Note Date.
-  The rental income must be documented with a copy of the fully executed lease agreement
-  The receipt of a security deposit from the tenant and deposit into your account or held in escrow by the settlement agent
-  You must meet the minimum requirements for reserves.  I have seen two months for each property owned up to 6 months.

It all depends!  Or you qualify with both mortgages and reserve requirements.  One way to get rid of mortgage insurance is to put down 20% of the purchase price.
  • July 29
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Brian is spot on with his information. New underwriting guidelines have significantly raised the bar for those who want to convert a primary residence into a rental property. 
  • July 29
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I believe you are talking about renting out what is your current primary residence, to then go out and buy a new primary residence, correct? If you are looking to buy a new house, and want to keep your current home as a rental property, on a Conventional loan you need to show the lender who is making the loan on your new home some things that you would not if you were selling your current home instead of renting it. You need to show 6 months "cash reserves" after the down payment and closing costs on the new house, and you need a 70% loan-to-value (LTV) on your current home. Fannie Mae and Freddie Mac have this significant equity requirement they force banks to follow because they are trying to avoid people who aim to do a strategic default, now or in the future. Many people in the post 2008 collapse bought new homes and temporarily rented the homes they moved out of because they were underwater on the mortgage compared to the value of the home. So they decided they would rent the home to cover as much of the mortgage as they could, and then buy a new home. But ultimately, there were enough people that then defaulted and got foreclosed on after moving into their new home, strategically or not, that Fannie Mae and Freddie Mac have this new requirement to avoid that scenario. You could consider renting your current house for a period of time, then instead of buying a new home you could go be a renter somewhere yourself, then when you have rented your home, for at least a year (this period of time seems to vary at different lenders), then you could buy a new home without having the 30% equity requirement, because then you would be not departing a primary residence, since you already had a 1 year landlord experience with your former primary residence, and the 30% equity requirement is removed.

But if you meet both of these requirements (the 30% equity and the 6 months cash reserves), you can count the rental income on your current house to offset the mortgage immediately without having a history of renting it, which will help you qualify for the new mortgage. Otherwise, you will have to qualify for a new mortgage carrying "all" the debt on the current mortgage and using no rental income to offset the debt, and usually most people cannot qualify for two mortgages at the same time.

And if you do meet the cash reserves and the 70% LTV requirements outlined above, the banking industry will only count 75% of the gross rent on your current home (as evidenced by a lease) to offset the mortgage. They take away 25% to account for vacancies, expenses and maintenance. So if you have a $3,400 a month mortgage, and can show a $4,000 a month lease, they will only count 75% of that $4,000 a month lease (or $3,000) against the old mortgage. In this case, $4,000 gross rent, with $3,000 net rent (after a 25% deduction on the $4000 gross rent) would leave a $400 a month shortfall and would be counted against you as a debt in your debt ratios.

When people learn of the above, they end up realizing that in many cases they need to sell their current property, because they do not have sufficient equity to meet the requirement and they cannot qualify carrying two mortgages at the same time without counting rent to help cover the old mortgage.

If you are taking out an FHA loan for your new purchase, the rules are the same except you only need a 75% Loan-To-Value on the current home, as evidenced by a recent appraisal. Either way, buying a new home without selling yours, and trying to rent your current home, has become much more difficult. 
  • July 29
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