Buy 2nd home as primary residence while renting out current home

8 Replies

Hey Everyone,

I'd like to get some of your advice on strategies for purchasing our second home as a primary residence while renting out our current home. 

My wife and I live in Hawaii in our first home that we bought in 2013. We used my $0 down VA loan for the purchase. It's a 30 year loan at 3.25%.We now have about $175K in equity. Current loan balance $615K with market value right around $790K.

We are considering moving back to our home state of NJ and we want to rent our current home in Hawaii and purchase another home in NJ for us to use as our primary residence. We would be using a property manager to manage the Hawaii house for us since we would be so far away. The rent we could get on our current home would be enough to cover the mortgage and property manager with maybe a little extra (~$100/mo?).

Our monthly debts: 

- $3150 for mortgage (which will be paid by tenants)
- $1200 for credit cards minimum payment
- $350 for student loans
- $250 for vehicle loan

We both work full time jobs. Together, our income now is $190K/year but will change to about $150K/year if we moved to NJ. We don't have any savings except for retirement accounts. 

So my question is: what would be the best way to go about buying a second house to live in while renting out our current home?

Here's the options that I can think of: 

1) Refinance current VA loan into a conventional mortgage so that we can use our $0 down VA loan again to purchase the second home.

2) Take out an equity loan from current VA loan to use as the down payment. Although I don't know if there is enough equity to take out.

3) Leave the current VA loan as is and save enough money to use as the down payment. I'm assuming we'd need 20% down on the new home. We can't use FHA since we already have a VA loan, right? If it's 20% we need to save, that could take a long time.

I'm unsure if lenders will allow us to use the rental income to offset our monthly debts in order to get approved for the new loan. Will they exclude the current monthly mortgage as a debt if the rental income is enough to pay it? Or will they still count that first mortgage against us in terms of our debt-to-income ratio? Does anyone have any experience with this type of situation? I know I need to talk with a lender to see if we qualify but I wanted to get some feedback before doing that.

I guess there's two main issues I'm asking about: (1) how to get money for the down payment of the new loan and (2) if our debt-to-income will qualify us for the new loan. 

Thanks!


I'm unsure if lenders will allow us to use the rental income to offset our monthly debts in order to get approved for the new loan. Will they exclude the current monthly mortgage as a debt if the rental income is enough to pay it? Or will they still count that first mortgage against us in terms of our debt-to-income ratio? Does anyone have any experience with this type of situation? I know I need to talk with a lender to see if we qualify but I wanted to get some feedback before doing that.

It's my understanding that you need to show the rental income for two years on your tax return before it can be counted as income. I applied for a loan and it showed I have two mortgages which set my DTI way off.

Mike,

Im working that exact situation In VA right now. I am to close on my new property that is being built on 30 sept. Ill describe what I went through below.

In my case I had not used my complete VA coverage in my initial home purchase. In Norfolk, VA Veterans get a total of 458800 in total entitlement. so lets do the math.

The VA guarantees .25 of the loan. = 244,000 (price of my current home) 244,000 x .25 = 61000.

tottal entitlement is 458800x.25 is 114700.  Then 114700-61000 is 53800.

53800 is my remaining entitlement toward second property.53800x4 =  2148000.  This  now is how much house I can afford with having to make no down payment.  

Since in my case the new home purchase price is 260000 the VA mandate is that I cover the remainder which is 260000-214000=45200. my down payment is .25 of the difference. 45200x.25=113000. This amount I have to take with me at closing. Again, this is only because I went over my entitlement.

Most lenders I that I encountered wanted to know that the original property was income producing prior to financing and taking the risk on the second one. They asked for the rental agreement and deposit check (copies) as part of the application process. This has to do with you DTI and the loan program That you qualify for.

All things considered in your situation. I would recommend refinance your Hawaii house under the VA IRRRL program. This is a quick process. Most can get it done in under a month. No income verification required.

Take the cash out option, then use the cash as a down payment on Jersey property.  175k should be able to get you about 800 thousand at 20 percent down.  The math is not exact on that.  Im originally from NY.  800k should be able to put a roof over you head in NJ.

There will arise the question of occupancy. The VA does not care about the rental as long as you have lived in it for some period of time. This period is not specified. Occupancy requirements for the IRRRL is the you have "previously lived" at the address refinanced. Brokers unfamiliar with the program will try to tell you other wise.

Begin by calling your respective VA field office. While you do that, ask for your certificate of eligibility. Have your ducks in a row prior to calling the bank. some will trying to give you crazy numbers. Know what you are talking about before calling the broker.

In my case I had to explain the whole concept a few times before he got hold of it. A few flat out said it was impossible. You can make it happen. It will take patience. The VA office will explain it all to you.

I don't remember the detail on a VA loan so I will defer to the previous poster on that. Contact a decent mortgage broker. I don't remember which does what but I know Fannie and Freddie deal with rental income differently. Chat with a broker that understands these differences. They should either know off the top of their heads or be able to find the guidelines in a few minutes.

@Mike Sanz  
@Troy Kerr is spot on. VA will allow you to offset the PITI for the current house (VA loan), as long as you are getting another VA loan. If you have a mix of VA and Conventional then its get a bit complicated.

Before you do the IRRRL I would recommend that you work with a knowledgeable mortgage banker to understand the different scenarios. It will come down to the amount of entitlement you have left over, your funding fee, how much of a house you want in NJ and how much you can afford to put down. A good banker should work with you to analyze and review the different options so you can make an educated decision.

Upen Patel

Mortgage Banker, VA Loan Specialist

National Lender, Federal NMLS# 1374243

Medium tfsb   fdic   eh   squareUpen Patel, The Federal Savings Bank | [email protected] | (571) 331‑5161 | http://thefederalsavingsbank.com/upenpatel | Lender # National Lender NMLS# 1374243

Upen patel,

I would only hope one day to have a fraction of your knoledge on such a topic.

I was just glad for once I was able to help someone instead of always asking rookie questions. I'll send you a request.  I'm sure I have a million questions.  Plus I grossly under qualified for your position.

Thanks for ratING me.  Though I still don't even know what that is.

Can you tell me what wholesale mortgages mean.

Thanks again.

If it was me I'd sell the HA house today.  Pay off my student loans and credit cards and as a down payment for a NJ residence.  Then I'd start saving money.    

If  you are making $190K and have significant credit card debt now you will most likely have more credit card debt once you start making $150K.  Yes I know cost of living is less in most of NJ, but you will have some very significant costs with your house in HA.  Normally, non-mortgage costs run about 50% of rent.  It might be a little less for you since it will be such a high rental amount.  I don't know your expected rent, but if it is $3,000 and say you keep your expenses to 40% of income over the next four years, then you'd be clearing $1,800 however, then you would have to pay P & I of about $2,600 a month.  So you'd be losing on average about $10,000 a year on the HA house.  

To put it another way you would go from $190K in income in HA to $140K in income in NJ.  

BTW if you sell the HA house now you won't owe any capital gains taxes depending on when you bought it in 2013.  

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