Buying a new home without selling the old one?

Posted by  on Jul 20, 2011

I'd like to buy a new home at the other end of town, but have not been able to sell my old home. My real estate agent said that I can cover my current mortgage payment by renting out the old home. Do mortgage lenders count this rent in my income when I apply for a new mortgage?

Mortgage lenders guard against "buy and bail"

Because of a "buy-and-bail" strategy some homeowners have used in depressed housing markets--putting renters into their underwater homes; purchasing new, cheaper homes nearby; and then letting the old homes go into foreclosure--lenders no longer allow you to count rental payments for the old home as income unless you have at least 25% home equity in it. Without 25% home equity, lenders won't approve home loans unless the applicants' debt-to-income ratios are satisfactory even with two mortgage payments.

Qualifying with two mortgage payments

For example, a homeowner earns $6,000 per month and has housing expense of $1,500 a month and bills of $500 per month. Her housing expense-to-income ratio (called a top-end or front-end ratio) is a comfortable 25% ($1,500 / $6,000), and her total debt-to-income ratio (also called a bottom or back-end ratio) is a respectable 33% ($2,000 / $6,000). She finds that today she could buy a better home for $1,000 a month and rent the old one for $1,000. If she has only 5% equity in the current home, however, mortgage lenders count both payments against her and give her no credit for the rent income. So her ratios would be 16% and 50%; a 50% back-end ratio is probably not acceptable.

Qualifying using rental income

If she has 25% equity in her current home, however, the lender would add $750 to her income (75% of the $1,000 rental income), giving her ratios of 14.8% ($1,000 / $6,750) and 44.4% ($3,000 / $6,750). With good credit, she'd be able to qualify for new home loans.


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