If you are looking to buy a new house, and want to keep your current home as a rental property, on a Conventional loan you need to show the lender making the loan on your new home some things that you would not if you were selling your current home instead of renting it. You need to show 6 months "cash reserves" after the down payment and closing costs on the new house, and you need a 70% loan-to-value (LTV) on your current home, as evidenced by an appraisal.
If you meet both of these requirements, you can count the rental income on your current house to offset the mortgage, which will help you qualify for the new mortgage. Otherwise, you will have to qualify for the new mortgage carrying "all" the debt on the current mortgage and using no rental income to offset the debt, and usually most people cannot qualify for two mortgages at the same time.
And if you do meet the cash reserves and the 70% LTV requirements outlined above, the banking industry will only count 75% of the gross rent on your current home (as evidenced by a lease) to offset the mortgage. They take away 25% to account for vacancies, expenses and maintenance. So if you have a $3,400 a month mortgage, and can show a $4,000 a month lease, they will only count 75% of that $4,000 a month lease (or $3,000) against the old mortgage. In this case, $4,000 gross rent, with $3,000 net rent (after 25% deduction) would leave a $400 a month shortfall against the $3,400 a month mortgage and would be counted against you as a debt in your debt ratios.
When people learn of the above, they end up realizing that in many cases they need to sell their current property, if if they have a desire to keep it as a rental property.
If you are taking out an FHA loan for your new purchase, the rules are the same except you only need a 75% Loan-To-Value on the current home, as evidenced by a recent appraisal. Either way, buying a new home without selling yours and trying to rent it has become much more difficult.
Tags: investment property, underwriting rules
