If your goal is to buy a replacement home before you sell your current home or if you plan to keep your current home as a rental and buy a move-up (or move-down) home, your lender will have to use the PITI (Principal, Interest, Taxes, Insurance) of both houses when calculating your Debt-To-Income ratio. The debt on your current home will negatively impact your purchasing power for your next home. It takes a lot of income to qualify for a mortgage to buy a home in Santa Cruz County and it will obviously take even more income to qualify for two mortgages. Move-up homeowners who plan to buy another home before selling their current home may not be able to qualify for both mortgages .
New rules have recently come into play to help homeowners buy before they sell when they are converting their current residence into a rental property. The nation’s largest providers of mortgages, Freddie Mac and Fannie Mae, have revised their policies regarding “Departure Properties”. A departure property is the home that you now own and live in but will be moving out of as soon as you buy another home. As the housing crisis deepened and home values fell, Freddie Mac and Fannie Mae instituted strict policies regarding who could and who couldn’t use rents to offset mortgage payments on departure properties. Those rules have now relaxed and here is what they say.
As long as the departure property has at least 25 percent equity, the most lenient policies allow a borrower to use 75 percent of the rents they will be collecting from their departure property to offset the PITI of that property as long as they have a signed rental agreement from the prospective tenant. Some lenders are adopting a stricter policy by requiring proof of receipt of the rental deposit monies and some lenders are requiring a drive-by appraisal to confirm that the current mortgage(s) on the departure property is not larger than 75 percent of the value of the property.
FHA loans have an even stricter policy regarding rental income on a departure property. FHA underwriting guidelines will not allow the borrower to count the rental income unless the homeowner’s move-up (or move-down) home is located at least 100 miles away.