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Mortgage Q&A: How do I convert my primary residence to a rental?

Posted by Justin Rollo July 8, 2014 01:55 PM

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Today's article comes to us from a question posed by one of our readers. We love answering our reader's questions whenever possible. Should you want answers to any of your real estate please don't hesitate to send them over to questions@propertiesinthehub.com.

Craig,
I am currently living in a single family in Roslindale and have been thinking of upgrading a bit but wanted to hold my place as a rental. What's the process for getting a mortgage on a new home if I want to hold my current place?
~Dave H
Roslindale

Dave,
Great question! You're not alone in wanting to convert your current home, with soaring rents it is becoming more and more common. Redfin recently surveyed 1,909 homebuyers across 22 major metro areas in the U.S. Among those who already owned a home they found 39 percent planned to buy a home and rent out their existing home instead of selling it. The study found that many of these owners had locked in at historically low interest rates on their current home and with this low rate and the booming rental market they recognized the opportunity to create monthly cash flow as the potential rent outweighed their current mortgage.

If you are like most Boston First Time Home Buyers, you are not planning on living in your 600 square foot basement unit condo forever! Many home owners assume they can automatically use rental income to help offset their current mortgage when buying a new home. However, in order to use actual rents to offset your current mortgage, you will need to provide extra documentation and follow additional guidelines or your new purchase will be subject to qualifying for both mortgages without the help of the rental income. Your lender will be required to verify you have a minimum of 30% equity in your current home to support both the current principal, interest, taxes, insurance and /or condo fee payments and your new purchase. You will need to provide an interior and exterior appraisal dated within 60 days of your new purchase to support the equity.

Follow these guidelines to ensure you are prepared to buy your next home while maintaining your current home as an investment:

For a one-unit property the following guidelines are in effect:
- If you have greater than or equal to 30% equity... then 75% of gross rental income may be used as income on your application
- If you have less than 30% equity... then no rental income will be allowed on your application.

For a 2-4 unit property the following guidelines are in effect:
- If you have greater than or equal to 30% equity... then 75% of gross rental income may be used as income on your application
- If you have less than 30% equity... then no rental income will be allowed on your application.
- The remaining units will utilize the net rental income (or loss) from the pages of the borrower's most recent year of signed Federal income tax returns and the related Schedule E. Leases are only permitted if the property is not listed on the Schedule E because it was acquired subsequent to filing the tax return.

Depending on your equity position of your current home, you will either be able to use actual rents or you will need to qualify for your new purchase and your current total mortgage payment:
- If you have greater than or equal to 30% equity in a one-unit residence... then the borrower must be qualified with the new total payment and 75% of the gross rental income may be credited to offset the current principal residence's total payment.
- If you have less than or equal to 30% equity in a one-unit residence... then the borrower must be qualified with the new total payment PLUS the full amount of the current principal residence's total payment
- If you have greater than or equal to 30% equity in a 2-4 unit residence... then the borrower must be qualified with the new total payment plus the total payment on the current principal residence minus 75% of gross rental income from the newly leased unit, plus, if applicable, any credit from existing leased units.
- If you have less than 30% equity in a 2-4 unit residence... then the borrower must be qualified with the new total payment plus the total payment on the current residence minus, if applicable, any credit from existing leased units only.

As you can see, you need to be prepared to qualify for both mortgages if you cannot document the required 30% equity. If you are not sure about your current equity but are not ready to order a full appraisal (remember they are only good for 60 days), I suggest you reach out Justin Rollo from Properties in the Hub for a complimentary comparable market analysis (CMA). Do not hesitate to contact me with any questions or if you have any additional mortgage needs.

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About this blog

Justin Rollo of RE/Max Realty Plus in South Boston provides an analytical and irreverent look at the Boston real estate market. More »
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