With interest rates and home prices steadily climbing, I'm realizing it might be my last chance to invest in real estate. It turns out that qualifying for a mortgage on another home is strict because lenders are afraid people will "buy and bail." During the housing correction, some people purchased a new home and let their previous home slip into foreclosure even though they told the mortgage company they were going to keep the existing home as a rental property. Now, it's making it more difficult for those of us who actually want to buy a new residence, but keep the existing home as a rental property.
Getting a signed lease agreement
In order to get a new mortgage, our lender requires a signed lease on our old home. We would have to be willing to move in with relatives in order to establish that our old home is being used as a rental property. Some lenders told us they needed proof from tax return statements and rental agreements that the home had been successfully rented out for at least two years.
Saving up financial reserves
All of the lenders I talked to said we would need financial reserves to pay the mortgage and maintenance on our rental home for at least 6 to 12 months. We also had to show we had enough in savings to cover the new mortgage as well. At this time, we don't have nearly enough money in savings. However, we now have an idea of how much we need in liquid savings to qualify for a new mortgage.
Meeting rental requirements
Our lender also told us that the FHA requires we have at least 25 percent equity in our rental home. At this time we only have 20 percent equity. We may be at least one year away from having the required equity, depending on how much homes in our area appreciate.
Having enough income
Even if we were able to rent out our existing home for more than a year, the lender said only 75 percent of the rent could be counted as income in the debt-to-income formula. We could either generate more income or reduce our debt. At this time, most of our debt is fixed with a mortgage of $900 and car payment of $300. Our best move is to pay off our car loan so that it frees up more of our income to qualify for a new loan.
Even though we aren't in the financial position to take out a new mortgage now, we know what we have to do. We estimate it will take two years before we are able to qualify for a new mortgage because we'd have to save up for a 20 percent down payment.
Even if the lender didn't require a 20 percent down payment, it would give us more confidence that we really won't buy and bail.
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