It is not uncommon for homebuyers to want to close on their new home while they still own their current home. The mortgage issue involved is called the “Departure Residence” and the rules around this have tightened up . This is a change that has been around for a couple years but it’s worth hitting the highlights.....
Regardless of the reason why (pending sale, conversion to rental, going to list it later…), the homebuyer who is retaining their current home will have to deal with the payment qualifying and reserve requirements that are required for a Departure Residence….
This homebuyer can get approved for a mortgage but there are a few pitfalls. We will cover use of Rental Income and Required Reserves, and a few other topics all related to obtaining CONVENTIONAL financing. (FHA and VA have other rules)
So, do I have to sell my current home to qualify for a new home loan?
Maybe or maybe not. Two issues, to deal with:
First, do you have the cash to make a downpayment on the new home without the sale of your first home? There are ways to deal with this (a common method is a loan from a 401k but that’s not the only way).
Second, can you qualify for a new mortgage payment while still carrying the original mortgage payment? This is the more complicated issue for most clients.
Remember for qualifying you must always count the Principal and Interest on your loan payment, plus property Taxes and homeowners Insurance and Homeowners Association dues on each property owned (acronym is PITIA). So in this case you would have to handle the PITIA for your old home and the new one.
What If I Rent My Current Property can I count that rental income for qualifying?
Maybe or maybe not and this is the scenario that has tightened up the last few years. If you’re not quite qualified to carry both mortgages, you may have to show rent from the departure residence in order to offset the mortgage payment.
Here are the requirements for rental of a departure residence:
1. Must have a minimum of 30% equity in the departure residence.
2 Must provide a fully signed lease plus proof of receipt of the earnest money deposit.
4. With all conditions met, the lender will only count 75% of the gross monthly rent as qualifying income.
And Don’t Forget Required Reserves!!!!
For a departure residence scenario, lenders will require additional reserves over and above whatever reserves may be required for the particular loan program. The requirement is SIX MONTHS of reserves of PITIA on BOTH the new subject property and the departure residence. This requirement can be reduced to TWO MONTHS on both properties, if the borrower can show 30% equity in the departure residence.
For these reserve requirements, they still have to be met regardless of whether the departure residence is going to be used for rental income, converting to a second home, or even if it’s just a pending sale.
What If I Can’t Qualify Based On Both Mortgage Payments?
This answer here is pretty straightforward, and doesn’t require a financial calculator to figure out.
If you are in this situation, then you will have to sell your current home before buying a new one.
If you aren’t sure of the value of the home or how your local market is performing, give us a ring and we’ll happily refer you to a great real estate agent that is in tune with property values in your neighborhood.
As you can tell, purchasing a new home while still in ownership of your current residence can be a very complicated transaction. Please contact us at anytime so we can review your specific situation and suggest the proper action plan.
This scenario like many others requires careful planning between the client, the lender and the Realtor. It’s only with the Realtor’s market expertise of values, going rents, average days on the market, etc., that a client can make an informed decision about dealing with a departure residence.
For a departure residence scenario, lenders will require additional reserves over and above whatever reserves may be required for the particular loan program. The requirement is SIX MONTHS of reserves of PITIA on BOTH the new subject property and the departure residence. This requirement can be reduced to TWO MONTHS on both properties, if the borrower can show 30% equity in the departure residence.
For these reserve requirements, they still have to be met regardless of whether the departure residence is going to be used for rental income, converting to a second home, or even if it’s just a pending sale.
What If I Can’t Qualify Based On Both Mortgage Payments?
This answer here is pretty straightforward, and doesn’t require a financial calculator to figure out.
If you are in this situation, then you will have to sell your current home before buying a new one.
If you aren’t sure of the value of the home or how your local market is performing, give us a ring and we’ll happily refer you to a great real estate agent that is in tune with property values in your neighborhood.
As you can tell, purchasing a new home while still in ownership of your current residence can be a very complicated transaction. Please contact us at anytime so we can review your specific situation and suggest the proper action plan.
This scenario like many others requires careful planning between the client, the lender and the Realtor. It’s only with the Realtor’s market expertise of values, going rents, average days on the market, etc., that a client can make an informed decision about dealing with a departure residence.
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