First house the hardest?? Obtaining second property question

4 Replies

I am confused on the process of obtaining a second property and am hoping some of you wonderful people could help make sure I am thinking about this correctly

I bought a 3B 2.5BR single family house about 2 years ago and have been living in it. I have experience renting out one room.

My goal is to purchase a second single family house. So my first house would be a rental. I would live in the second house.

For easy numbers let’s say house 1, the current house I living costs $300k and I put down 20%. House is worth between $350k-$375k thanks to a strong Seattle housing market. Once I finish a few upgrades it should be worth a little more.

My plan would be to find a second house around $300k and put down 20%.

Because I am poor I would need to count on the rental income of the first house or I will qualify for a very small loan since my debt to income would be too high. I spoke with my current lender and they said that they only count 75% of the income I have taken in from rent. I understand this 75%. But I have only rented out one room of the house, which is obviously much less than if I rented out the whole house.

Current mortgage payment on the first house is ~$1500/month and conservatively I can rent out the whole house for $1900/month. But since I have only rented out one room at $600/month, the bank will only look at $600/month x 75% or $450/month. What a scam! Am I really supposed to rent out the whole house for max rent just to show a history? This is absurd to me, but I will live in a tent for a year if I have too.

My questions are:

How do I get the bank to take into consideration the FULL rent I would receive if rented out the whole house, not just a room? I understand if they can only count 75% of an estimated rent.

Is there anything I am just completely not understanding or have missed?

What strategies have you used to purchase a second property?

Am I going about this the right way?

I thought the first house was supposed to be the hardest!! Advice and sage wisdom is greatly appreciated.

Thanks,

Jordan

Most lenders are dealing with FNMA guidelines and what they need to show in underwriting for FNMA to back the loan.  The rules you are encountering are likely not originating with the bank, but rather underwriting rules related to FNMA (just speculating).

You will be in a much stronger position if you show a fully executed lease for $1,900/mo, ideally with an occupied rental property, versus claiming what is possible.  Even stronger is a 1-2 year old rental history of that income.  You may find a lender who will consider the $1,900 amount for your income with only a newly executed lease.

It is not a scam.  Such rules are in place to prevent scams, such as claiming inflated property income.

Alternatively, you can pursue commercial lenders and higher rates to avoid those underwriting guidelines.

Jim.

The first house is the hardest when you already have another house (i.e, the one you are living in). In your case, you haven't done the first house yet because you are talking about converting your primary residence into a rental. Your primary residence doesn't count as "the first house" because it's not meant as an investment (although it can be, depending on your market) first, it's meant as a place to park your behind first. 

Anyway, in your case, since your income is not large enough to qualify for a second mortgage, one strategy you could employ would be to rent a property for your primary that is less (hopefully far less!) than your current mortgage, allowing you to bank the difference. Alternatively, you could buy a house far cheaper than the one you are proposing to buy ($300k). 

Hi Jordan, if you instead bought the second house to rent, some lenders would consider 75% of market rent there in calculating your income. Alternatively, if you can sign a lease for your existing house which starts after you close on your next primary residence, some would look at that also.

Recently I've been working with Jackie Shuey at Movement Mortgage and I think you'll find her easy to work with. Non-bank lenders such as Movement are offering more flexibility than banks these days. 

https://movement.com/lo/jackie-shuey/

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