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Lending rules for accidental landlords

Posted by Rona Fischman October 22, 2010 02:04 PM

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Accidental landlords are owners of a “departure residence.” That’s the house or condo that was left behind when the owner bought and moved into another house or condo.

Today, I describe the qualifying rules in regard to what rental income counts and under what conditions it counts. There are equity requirements before the rent counts at all. And… reserve requirements.

If a borrower does not have enough income to qualify for mortgages on both properties, he/she will need to prove that there will be rental income to help cover the cost of the new property’s mortgage. A borrower cannot count rental income based on a rental appraisal. Those days were gone by 2008. In 2008, the rules changed to require proof that there is a real renter with real money. That proof was a one-year, or longer, lease and proof of paid first month’s rent or security deposit. Then 75 percent of the rent will be counted, in most places. (There are some exceptions because of expected vacancy rates.)

In 2008, the borrower also had to have 25 percent equity in the soon-to-be rental. Now, it is up to 30 percent equity.

A borrower has to show that he/she has two months reserve on the PITI of both the departure residence and the new property.

If the borrower’s equity in the departure residence is less than 30 percent, no part of the rent is counted toward PITI. The borrower must also show 6 months cash reserves for the PITI of both properties.

These standards are not much help to people stuck in their starter properties. If they bought anywhere near peak, they are unlikely to be in a good enough equity position to be able to count their rental income. With the prospective rent not counting, and the 6 + 6 month reserve requirement, there are lots of people who would love to be able to be accidental landlords, but can’t.

Would you be an accidental landlord, if you could get a mortgage?

This blog is not written or edited by Boston.com or the Boston Globe.
The author is solely responsible for the content.

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About boston real estate now
Scott Van Voorhis is a freelance writer who specializes in real estate and business issues.

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