Questions about renting out my current home, and getting another mortgage on a second home.
North Charleston, SC · Member since 2013 · 19 posts · 0 votes
I have done a lot of research about this, and what I know isn't a lot.
I know I can't have more than one FHA loan at a time and I have to live in the FHA loaned home. I currently have an FHA loan on my home. My interest rate is fixed at 4.25%. Could I transfer the mortgage to a different type of loan and still get this interest rate?
I know the interest rate for an investment property is normally 6%. Does this affect my interest and mortgage interest as well?
Can I use the equity in my current home as a down payment or collateral for another property?
Any other advice would be appreciated as I am very new and renting out my current home will be my first real estate deal.
Thanks
You could refi your existing house. You can likely do better than 4.25% right now, though rates fluctuate frequently. Current rates are closer to 3.5%.
You should be able to do MUCH better than 6% for an investment loan. Maybe half to one point above OO rates. Unless you're talking about an apartment building or some such.
If you buy another house for a residence and keep the old one, keep in mind that you will need to qualify for both loans. Any potential rental income won't be counted toward qualification.
If you take out a HELOC on the current house, just do the math on how that effects your cash flow.
Don't fall for the "cash flow = rent - mortgage payment" myth. Most houses make crummy rentals because the price (payment, really) is too big compared to the rent. Knowing nothing else, I'd guess that's the case for yours. Give us some numbers.
You can not 'transfer' a loan from one loan product to another. That creates a need to refinance. I didn't understand the 6.0% rate question. Interest rates on investment properties are higher than interest rates on primary residences since the risk is greater to the lender.
You can use the equity if you tap into the equity through a cash out refinance as a down payment with certain qualification guidelines being applied. Remember a cash out refinance on an investment property is a higher risk and thus has a higher interest rate than a purchase loan for an investment property. Additionally, you will have loan to value restrictions, so don't plan on taking the loan to 100% of value, they will not let you do that.
Traditionally, you can not use "Boot Equity" or equity from another property as collateral for a new property. There are "some" loan programs which allow for this but typically they are programs using boot equity from the primary residence as further security and not as the only security. Since the old property becomes an investment property, it is not likely you can cross-collateralize both properties into one loan either.
The good news, in the idea of the plan you have above. The first step will be to see about a cash out refinance on the investment property. Once you satisfy the current FHA loan, you will be able to seek a new one. Those loan products have lower down payment requirements, so to some degree you may not need a bunch of equity from the investment property.
When you inquire about refinance of the investment property, make sure you do not get restrictions on the use of funds from the cash out. Some loan programs have restrictions and some don't. Not a huge barrier, but a detail to know, nonetheless.
You could refi your existing house. You can likely do better than 4.25% right now, though rates fluctuate frequently. Current rates are closer to 3.5%.
You should be able to do MUCH better than 6% for an investment loan. Maybe half to one point above OO rates. Unless you're talking about an apartment building or some such.
If you buy another house for a residence and keep the old one, keep in mind that you will need to qualify for both loans. Any potential rental income won't be counted toward qualification.
If you take out a HELOC on the current house, just do the math on how that effects your cash flow.
Don't fall for the "cash flow = rent - mortgage payment" myth. Most houses make crummy rentals because the price (payment, really) is too big compared to the rent. Knowing nothing else, I'd guess that's the case for yours. Give us some numbers.
Sorry I meant property taxes are 6% on investment properties.
Do you have any idea why I wouldn't qualify for an FHA loan in a certain county versus another?
That happened to us when we bought this house. We had to move to another county to afford the house we wanted. Now we are stuck in area we don't like. We love the house but want something in the area we want to be in. Our realtor told us we didn't qualify for an FHA loan in our old county when we were looking for homes. Any idea? I think she mentioned something about our income being too high.
Your best bet is probably to call a few lenders (without applying & no credit report checks as that can hurt your credit score) as there are just way too many options depending on your individual circumstances.
You do not have to live in the FHA home forever, and you' don't have to refinance it if you move and rent it out. If you purchased it intending to live in it, lived there at least a year or two, you're fine. We actually have 2 FHAs as we purchased, then had to move a long distance for work after 2 years, so we met the exception to get a second one. You can qualify for another owner-occupied loan (just not FHA unless you meet exceptions) even if you rent out your FHA-loan home. For instance, Navy Federal has a 0% down owner-occupied loan program, higher rate, like 5 1/2%, but still, 0% down & no mortgage insurance, so helps make the 5 1/2% not seem so bad. We couldn't do it as only 1-4 mortgages allowed, but seemed like a decent program.
With any primary residence conversion to rental these days, you will have to qualify for a new home with both house payments counting against you, and no rental income counted for at least 2 years, so keep that in mind if you're planning to rent your current home and buy another owner-occupied one.
Unfortunately, with mortgage loan programs, you go in thinking there are standard rules and every lender follows those rules. They don't. They seem to add on their own conditions or special program that makes it harder or easier to qualify, so no one really knows except the actual lenders who are giving you the loan (and even they get things kicked back once submitted to underwriting, and you have more hoops to jump through). So plan on being confused when loan shopping. Everyone else is, too.
Mortgage payment with interest, home insurance, taxes, and mortgage insurance is 915 a month. Plus 50 a month for the home warranty which comes to 965 a month total. I am not including utilities, trash, and lawn care as they will be paid by the renter.
Typical rent for a home in my area like mine is 1500 a month. I have also looked at some of the homes that charge this and ours is much nicer. The area is a well established neighborhood. My neighbor who is a property owner and renter got over 60 inquires about the house he rented right next door to us. So I have a pretty basis to go off of. Also our home has a much better layout and space than what he rented. So I hope I can get around 1500 a month for it.
Do you have any idea why I wouldn't qualify for an FHA loan in a certain county versus another?
That happened to us when we bought this house. We had to move to another county to afford the house we wanted. Now we are stuck in area we don't like. We love the house but want something in the area we want to be in. Our realtor told us we didn't qualify for an FHA loan in our old county when we were looking for homes. Any idea? I think she mentioned something about our income being too high.
It always bugs me when a real estate agent chimes in on loan programs. Sort of like Howard Cosell, comments about the sport but never played it.
Your real estate agent is wrong in their statement. There NO income restrictions to FHA loans. Please stop and think about that. No Mr. Buyer/Borrower you make too much money so we think you might be able to pay us back, we can't give you a federally insured loan. Nonsense!
FHA does have loan limit restrictions per county. That is likely what you agent thought they were talking about but ended up miss speaking.
You can check the loan limit max here: FHA Loan Limits
Property taxes are not allocated by property occupancy. Property taxes are allocated based on the millage rate for the county and the accessed value from the county property appraiser. If your property taxes are 6.0%, not knowing 6.0% of what baseline you mean, I would say either your math is not good or you really need to go ask for a new assessment of your home. As far as I know, Texas is among the highest percent of Fair Market Value being around 2.5%.
Nobody here can tell you why you would or would not qualify for a loan. You don't want to share the personal information in this forum to get a proper answer. Remember, at the end of the day, you did qualify for a FHA loan, since that is what you have now.
You mention you had to choose another house in a new area since you could not afford the house. This leads me to believe your debt to income ratio exceed the 31% maximum for FHA. Remember, there are other loan products in the market have a different qualifications to them. Additionally, your DTI (debt to income) is a function of the your income versus your total debts. Jon pointed out above, as you step into landlord shoes, you will have to qualify for both loans without the income from the investment property being considered.
Go sit down with a loan officer and talk them about the big picture and have them run the numbers on you. There is a chance that if you don't look at both loans as a big picture you will further reduce your borrowing capacity for the new primary residence. There are a bunch of footnotes in my mind to what you want to do, but too much for posting here. Find a competent loan officer and talk them about it all, in fact find a couple. Moral of the story, your real estate agent is a real estate agent not a loan expert.
You should talk to lenders or mortgage brokers about loans, not real estate agents.
If you're paying for mortgage insurance, you probably don't have much, if any, equity to tap. If you owe more than 90% of the value of a property, you have no equity.
So $1500 vs. $915 is probably OK. Don't even think this means $585 or even $535 a month in cash flow. You will have other expenses, including routine maintenance. Even if the property is perfect now, it won't be once you rent it. Most maintenance is caused by the tenants. You will have vacancies, even if just short ones between tenants. Landlord insurance is more expensive than homeowners. You should plan on hiring a lawyer to review you lease and be available for questions. You should plan on hiring a CPA to do your taxes. If you hire a PM to manage it, you're going to pay them $150 a month plus $750 to do a turnover.
A nice home doesn't translate into higher rent. If rents are $1500 for similar size and amenities, that's what you'll get. If you try to get higher rent based solely on "nicer", you'll end up with a crummy tenant who's unable to get approved by anyone else and will put up with your above market rent. Markets set rents. You have to be in line with the market. As long as your house isn't a dump, it will bring market rent. Being extra nice won't bring extra rent.
Be careful about getting a new FHA loan. There are have been some major changes to FHA lending policy that makes their loans cost thousands more down the road.
New FHA borrows will need to have a credit score of at least 580 to qualify for the low down payment loan. If your FICO score is less than 580, you are not disqualified for a loan, but you will be required to put a minimum of 10% down.
Because you would be putting less than 20% down, you will be required to pay mortgage insurance. FHA has an upfront fee of 1.75% which is wrapped into your loan and a monthly fee of 1.30 % if the original loan amount to value is less than 95% and 1.35% if you put less than 5% down.
Typically, once you reach a 20% equity position, the PMI is removed. Not so with the new FHA loan changes. The insurance stays on your loan for the life of the loan for all new loans starting in June 3, 2013.
For example, if you are paying $112.50 (borrowing $100,000) per month in mortgage insurance and you pay the mortgage for the full 30 years, you will have paid $40,500 for insurance that benefits the lender.
Make sure you weigh the long-term costs to the short term benefits before you go get a loan.
I have had the mortgage since last April. So based on Simons response my PMI wuld be removed after 20% equity is reached.
The home is valued at 150000. We owe 125000 on it.
You should look at your promissory note to see the exact terms on the PMI removal. My experience has been that this is much more of a hassle than you would think. When you fall below 80% LTV (which would be in two years and three months, if my math is correct), you may have to get an appraisal to convince the lender the value hasn't fallen. Sometimes they will remove it without an appraisal at 78% (about 3.5 years from now for you). But you really need to read the note.
My statement about equity comes from the sales costs. If you sell in a good market, you're going to net about 92% of your selling price. So, if you sell for $150K, you'll net about $138K. So, your equity is currently about $13K. Not $25K like you might think. In a slow market, you'll net even less thanks to seller concessions.
Refi's aren't free. Costs vary, but I'd guess you would spend about $5000 to refinance this place.
Kinda seems like no matter how I do it I am gonna get reamed when I go to refinance or sell.
I have also been doing a lot of research about finding funding for other properties which seems to be impossible. I don't have money to put down on a property. It seems impossible to find hard money lenders anywhere. Who wants to take a chance on me. I know now one. I don't want to spend 250 a year for REIA fees, when I don't really think that will help me. I know the money is an investment, but I really want to do this with as little money up front as possible. I see wholesaling as a possibility, but how do you get a contract on home without putting money on it before you sell the contract to another investor?
Everyone keeps giving advice but it seems so overwhelming when it comes to the money aspect. I feel like well if you don't have about 50,000 in the bank for reno, down payment and fees, not to mention what you'll find once you start reno (I kow this happens, it already happened to me once with my current home) you are pretty much not going to succeed.
So how did everyone start. I am hoping to generate some extra income from renting my current home, but then I have to worry about qualifying for another loan so I have a place to live before I rent this home, so I can invest in other properties. I am not done with reno and the wife is not ready to move. Is there anything I can do to start out now. I have been trying to make contacts in my area and making colleagues, but everyone needs me to have some money for them before they even give me the time of day.
Do you see the never ending circle that's created here?
I am a graphic designer by trade, so marketing is easy for me, but no money means no money.
I also can do basic handy work and remodeling. I have many skills. But still who cares, I have no money.
If you have no money then why are you trying to rent out your primary residence & buying a new primary residence?
Stay where you're at, or if you can't afford the house, sell it & rent or move in with family.
Or don't go to a bank for your house and find an owner carry for 5-10 years. They are out there but a topic for another thread. ????
Ok I guess I should be more specific. I don't have a down payment for a home.
I have steady employment, it's a pretty good job, and plenty of spending money. I just don't have like 10000 saved.
Seems you need that to start. Am I wrong? Seems like wholesaling is the way to start but it seems like most are never successful.
So I feel like this is the old saying, "I have to have money to make money."
I can afford the house fine. I want to turn it into a cash flow property.
So is everyone saying renting my current property for cash flow and buying another primary residence is a bad idea? If I sell I don't feel like I would make any money.
I am a little confused by Scotts response. Maybe because he thought I was saying I'm broke, which is not the case.
Still no one answers my question. How did you start? Did you already have a ton of money saved? Born into money? Lucky investment?
Just curious. Would like insight as to where to start. I thought renting my current home after we fix it up was a good idea considering the cash flow I described earlier. Then I could use the extra income generated from the rental to purchase more properties. This is a bad plan?
Also to be very specific when I say I have no money I mean no down payment for a home. Not that I am extremely broke.
Kyle,
I didn't really understand what you're talking about. What's an owner carry? Need more detail about what you meant.
Find a house you like an a seller that will carry the mortgage. They are the bank.
Obviously you would need to research this and see if this fits your risk/reward model.
I know guys that rarely if ever go to a bank for traditional financing.
Maybe you just need to start at the basics. You say you don't have money but you also say you have plenty of spending money. Spending money adds up fairly quickly to down payment money when you don't spend it. My daughter works as a server in a restaurant and still managed to save up $5000 towards her first home last year, even though she pays rent (low rent as she split it with a roommate, but still rent, car maintenance & car insurance, 1/2 utilities, etc.), and she was part-time until she graduated in December. She was hoping to find a job in her field of study, but no luck yet. She's still saving, though, and trying to find an even cheaper apartment so she can save more quickly.
How did we start? We started by buying a fixer-upper REO for our first home, moved in and worked on it, took a while as we didn't have money to fix it up right away. Sold it 3 years later for a nice profit, bought another fixer upper & lived in it while we fixed it up, that took slightly less time, then did it again until we had enough equity in a house we were comfortable in. Got a HELOC and bought an investment property at auction, cash-out refi'd that one, bought another with those funds, etc. Back then, it was easier to get cash-out refi's on investment property. Didn't have the wait times you have now. A lot of our friends thought we were crazy buying such crappy houses, but they were all in great neighborhoods and made us good money.
What about moving out and finding somewhere to rent cheap in the area you like all while renting you home out and saving. Then when you have the cash, purchase the next house. Or maybe sell your house you currently own and bye a 2, 3, or 4 plex live in one unit and rent out the others. This way you might be able to purchase in an area you like, cashflow the property if you find a gem and maybe down the line, purchase another home when you can use the rental income to qualify. I'm not saying it is your ideal way but it could be an option. Some options are better then none. Good luck!
Kyle,
I bought a bank owned home for my first home. Mortgage is held by a bank.
I don't know how what you're saying is any different.
Lynn,
I am currently fixing up my first home right now. I am still trying to weigh the options of selling versus renting it.
I will say that simply, I am responsible with money, and I have enough to live comfortably. I would save if I could, but right now that just not in the cards, I have too much going on. I plan on starting a savings plan after I get married in August. I am sure you realize how much a wedding can cost, monetarily, and time wise. I have plans to start after that.
What I want to have help with is my plan which I have been pretty clear about throughout this post. Although no one seems to be reading or responding to it. So I want to fix up my current home and either rent it or sell it. The numbers are listed above. Basically everyone is saying I wouldn't make enough profit to sell, So I should rent it.
Just curious what others think and trying to get insight into my plan before I actually do execute it down the road.
Tim, It sounds like Jon answered your question about renting it out and selling, when he said payment of $915 versus rent of $1500 sounds okay and $13K net approx if you sell it at $150K. I gave you advice about looking for alternate forms of low-down owner-occupied financing so you could keep your FHA loan instead of having to refi or sell the house. Kyle explained looking for a home with seller financing, meaning look for a house that the seller owns free and clear so they might hold the note themselves instead of making you get a loan through a bank. So there's been some really good advice on here, just obviously not the answer you're looking for.
As far as saving money, it's all in your priorities and choices you make, whatever is best for you. I only responded as you act frustrated that you don't have down payment money and were asking how people actually do it, and I was trying to explain how people who don't have money to start actually do it. For instance, we chose a small family wedding at my parent's home. When we talked about getting married, I asked him, Can we buy a house instead of an engagement ring, because the one I really want would cost about as much, anyway (I know and love diamonds). We bought the home before we were married, and gave up the honeymoon (spent it in our new home and then went to Belize a few years later for our anniversary, then got a very nice diamond for my 10th anniversary, several homes later.) So it really is about what is important in your life together. If you're deciding on the wedding, have a great wedding and maybe rent out your current home and just rent a small apartment while you build up money for another house.
It's not that it wasn't the answer I was looking for, I just had a hard time seeing those as answers I guess. I am pretty new to this whole investing thing like 14 days new. But I know that I probably won't sell since it seems like I wouldn't get that much out of the house after the sale.
And to be very clear about people saying move to an apartment and save. I will never deal with that again. Too many bad experiences with renting for the last 8 years. Owning a home is wonderful, the privacy alone is worth the money we spend. So we won't be going back to that.
A multi-family would be an option if, again it weren't for the privacy thing. I am not being hard to deal with either I just can't stand the thought of living in an apartment again.
So I guess what I need now is to figure out how to either make the most profit off selling the house, or renting it with the most amount of cash flow with good tenants.
Thanks all for the advice. I will research more and stop asking questions that I should already know the answers to.
Then you obviously didn't even read what I said. Good luck to you though, whatever you do. I would further your real estate education I think before proceeding.
Kyle,
Kind of rude to say it like that.
You had a lot of typos and your answers were very concise. Which for someone that doesn't know a lot is hard to gather.
The point of this site is to learn, not to criticize. If I wanted to be told how little I know I wouldn't be asking questions now would I.
If I have to be made to feel like an idiot every time I ask a question then this isn't what I thought this site was for.
The FAQ says to ask questions to gain knowledge, not to be put down.
Also you said:
I would further your real estate education I think before proceeding.
What does it look like I am trying to do. I asked for a better explanation.
If you would have said, "hey, sometimes there are homes where owners own the house outright and they are willing to sell you the house and act as the bank. This way you don't have to go through the loan process. Basically you pay the owner of the home like you would a bank for a mortgage."
That's constructive. Not, "obviously you didn't read what I said."
Tim Hoskins, "owner carry" refers to a deal where the seller will finance the purchase. Instead of going to a bank and getting a loan, the seller agrees to loan you the money to buy the house. No money actually changes hands. Rather, its like the seller has two different hats. One is a lender, the other is the seller. The lender hat provides the money to you, which you turn around and give the the seller hat. Now the seller is no longer the owner and is instead the lender.
I bought my very first house using seller financing, 25 years ago. That was straight off the MLS and the agent mentioned the seller was willing to "carry the note".
This can sometimes be a good deal. The seller doesn't need the cash right away, so gets to collect the interest on the loan and gets to spread out the gains over the course of the payments. For you, the buyer, you can sometimes get into the deal with a lower down payment and less stringent qualifications than a bank loan. Now, these can sometimes be a bad deal, too. I bought that first house from an elderly widow. She had moved somewhere else to live with her kids and didn't immediately need the proceeds from the sale. We put a little under 10% down and had a 9% 15 year note. Seems horrible now, but at the time that was a below-market rate. Many of these sellers, though, are investors. They offer these deals at above market prices and not-so-good terms to people who can't qualify for a normal bank loan. Maybe that still works for you. But maybe you can do better with a more normal loan.
Investing in real estate (as opposed to real estate jobs like wholesaling, brokering, and fix and flipping) does require money. This game is really about cash-on-cash returns. While low money down situations are possible, they rarely produce any significant returns. If you want to invest in real estate (or stocks, bonds, bank CDs, or pork bellies), you really have to figure out a way to accumulate some cash to make that investment.
Jon,
Thanks for the reply. I understood what was being said mostly, I just didn't like being put down for it.
Thanks for the insight, and I also didn't know that most times the seller has worse market value if they finance it. So I will keep that in mind.
After all that has been said I think I am going to focus on either selling my current home a little further down the line for a profit. Which considering how much we have already remodeled should be doable. If that avenue doesn't seem like a good option then I am going to explore the rental aspect.
The only reason I any have some issues with renting is that I want to live in a home I own, and getting approved for two loans may be difficult. I would also need to save for a down payment while owning another one. Which I know is the ultimate goal so I guess I need to get started now. It would just be easier for me to use money made from the house to put down as a down payment.
I guess it comes down to lump sum for selling or cash flow to rent. Renting seems better long term really, but may be difficult to manage the two loans.