I am going to be in the market for a home in Tampa, FL early 2018. I own a home in Ruskin, FL that I am currently renting out. I owe $40k on the home in Ruskin with a mortgage payment of $700. After buying the Ruskin home for $56k, I put $20k into it, and currently rent it to long-term renters at $1,300 monthly. I recently had it appraised by a bank, and the appraisal came out at $160k.
My current annual income is at around $115,000. I have a $450/month car payment, minimal credit card debt, and a high credit score. I also have an untapped $35k HELOC on the rental house ready to use if needed. This could potentially be expanded given the appraised value of the home. I currently rent a home in the neighborhood I want to buy in, and when my lease is up in April, I would like to purchase a primary residence in that area.
My main objective is to purchase my primary residence without needing to sell the Ruskin house, which has become a nice passive income generator. Does anyone have any insight on what difficulty I might have in securing financing due to the fact I will be purchasing as second home (thought it will be my primary residence)? I could use the $35k HELOC on a down payment, but I am not sure what implications that might have in the financing process as well. I could potentially add between $5k and $10k to the down payment from savings, but would want to limit that as much as possible. I am looking at homes in the $250k to $350k range.
Any insight you might have as I approach this goal in 2018 would be greatly appreciated.
Thank you so much!
@Joshua Easters from my understanding, it’s very difficult to use equity in an investment property to fund other investments. I’m not sure how that translates into using it for a primary residence. However, if you are making that much money, and are generating cash flow, I don’t see why you couldn’t just buy the house with conventional financing. If you’re worried about the down payment, you could always use an FHA loan that requires as little as 3.5% down and it requires you to live in the residence for a year. Since you plan to live in it already, this isn’t a problem.
Do be aware that if you decide to use the FHA loan, putting a down payment less than ~20% will also cause you to pay the MIP (mortgage insurance premium) which is used to protect the lender in case you default on the loan. This would increase your mortgage by about $100 a month with a couple of fees included up front.
There’s also lease options where you could rent out a home from someone in the area of interest and have the exclusive right to buy the house for a certain number of years at a predefined price. This works really well if you’ve done research on the local market and pick a house that potentially appreciates a lot. You could save up money while renting the house out and later buy a very valuable home for the price that was determined when the lease option was signed.
I also forgot to mention that even though you have an investment property, a second mortgage under your name is no issue! Usually banks cap the number of real estate loans under your name to 4-8! So you should be in the clear with no problem of financing.
@Joshua Easters From what i see here it does not seem like you will need to sell that home. You can use a HELOC for down payment the repayment will need to be factored in but it is your money and secured by an asset. Also the rent covers your expenses so it is not seen as a drain on your income. The only thing not listed is you will need to show an account with reserve funds to cover any emergencies or vacancy but you can use bank accounts, 401K or other fairly liquid sources.
Do you have a specific reason to be claiming it as a second home? You get the most favorable terms as primary occupancy so if it will be used that way that would be my recommendation.
I Sorta did this a few years ago...this shouldnt be a problem...The bank will just wanna see that the rental has a lease and you are seeing cash flow come in..thats a good thing to them :) ..I had the down payment 20% from my savings to buy the 2nd home im living in..so that wasnt an issue for me...as long as you can swing the payments using the heloc as down payment shouldnt be a problem. with your salary im thinking is okay
Thank you @Jorge Quintero and @Bill Walton ! Bill, I worded that section of my initial question incorrectly. I meant second home in the sense that it will be the second home I own, but I will be claiming it as my primary residence. Thanks for the tips. My primary concern was in utilizing the HELOC for down payment, but it sounds like that will probably work. I was also working under the assumption that I would need 20% down, and was worried about utilizing the full $35k HELOC and adding $25k from savings on top of that, but if lower down payment financing is a viable option even while still holding another mortgage, it sounds like that would be the way to go.
I have put a large percentage of income into my 401k the last few years for the tax advantage, so I can use that account to show a reserve fund, but wanted to stay away from touching that money as far as the purchase of the home goes.
I appreciate all of the info!
@Alex Abanto Great, thanks for the info! Sounds like that worked out well.
Your rental property is NOT a burden, but rather a BLESSING to you in your next purchase.....and it has nothing to do with the HELOC or the equity. Since your mortgage payment on the rental is $700 and your rental income is $1,300, the lender for your new home purchase can actually USE the rental income to not only offset the mortgage payment altogether, but ALSO use the overage to help you qualify for the new mortgage payment of the new home.
Lenders can take up to 75% of the rental income. So, in your case, that is $975, which is $275 more than your payment that can be used toward your new purchase.
Keep in mind that if you take out the HELOC on the rental, or incur any type of new debt, those payments will ALSO have to be covered by that $275. So, be careful not to dip into your income for qualifying until after your purchase. In other words, if you can, buy your next property with funds you already have, then pull the HELOC out AFTER your purchase to cover rehab expenses and so forth. If you HAVE to pull funds from the HELOC to cover your down payment on the new house, just make sure that the payment for those funds don't exceed the $275.
@Joshua Easters Glad to help. You have good options for 5% and 10% downpayments while 20% is your lowest cost with low rates you may want those funds working somewhere else. If you have any specific questions as the time comes reach out I will be glad to help.
@Joshua Easters I've actually made this exact type of purchase so I know it can work. Some lenders may not allow this, and some may try to charge you a hither rate. Don't work with those lenders. If you have a solid credit score, a good annual income, positive equity and cash flow on the rental, you should not have an issue. It helps more if you can come up with 20% down payment without using the HELOC. If you are willing to put more of your own cash in the deal, lenders are more willing to take the bet.
Good luck to you.
@Joshua Easters based on your income it does not look like Debt to Income will be an issue. You can wash out the investment property expense with a lease or Tax Returns. I would look into options with only 3 to 5% Down