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Using Rental Income from an Underwater Property to Qualify for a new mortgage

By Edited Jun 20, 2016 0 0

Underwater Property

rental property

So you found your dream home.  Too good of a deal to pass up.  This is the home you have always wanted.  It sits on on the corner lot, has the two extra bedrooms and bathrooms you desperately need, pool for the kids, located in the perfect neighborhood with the awesome schools.  One problem.  What are we do with our current home?  The market has taken a nose-dive recently.  Property values are way too low to sell now.  If we sell our current home, we would have to take a loss.  Can't do that.  Why don't we just rent it out?  As long as we can find a tenant to rent it for enough money to cover our mortgage payment will will easily qualify for both mortgages right?  Wrong. 

If only things were this easy.  It makes sense that a lender would allow you to make this purchase and simply cancel out the existing mortgage payment on your current home because your old home will stay rented 100% of the time right?  Yeah, right.  Sometimes you have to look at it from the lender's perspective.  The lender knows that your current home will not stay rented 100% of the time.  The lender knows that there will be some occasions where a tenant will leave and the property will be left in not the best condition and may go vacant for a few months putting a strain on the homeowner who now has to make two mortgage payments.  One mortgage payment on their new "dream home" and another on the vacant rental property that is more than likely underwater. 

A lender knows that there is a very good possibility that a homeowner, who has just bought their dream home, may let the vacant rental property that has now gone unrented for 3 months and is in need of significant repairs go into foreclosure.

Because of this, it is going to be very difficult for you to buy your dream home without first selling your current home.  In a nutshell you will need an ample amount of reserves to cover both properties after down payment and closing costs have been paid.  If you need the rental income from the property you are planning to rent in order to qualify for the new purchase you will need a certain amount of equity in that property in order for the lender to count this rental income.  In addition, you typically will need the first months rent check from your tenant deposited into your account along with a fully executed lease agreement prior to closing on the subject property.  If you don't need the rental income to qualify for the new mortgage, it will more than likely will still be in your best interest to have the tenant lined up with lease agreement and first month's rent check deposited or you could run the risk of having the new purchased flipped to an investment property by Underwriting which is never good. 

As you can see there are a few hoops you will need to jump through to pull off this type of transaction but with good income and good assets your dream home in an underwater market is attainable.

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