Primary residence becomes rental property

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Primary residence becomes rental property

Samuel Vogt
Pittsburgh, PA · Member since 2017 · 36 posts · 23 votes

I purchased my first home in 2014. It was listed as my primary residence, but has been an investment property for the last 2 years since I had moved in with a friend.  At this moment I am looking to purchase my next property, and trying to be strategic about financing.

I met with a small portfolio lender today to get some numbers and see what financing might look like.

My original strategy was to do a cash out refi and roll my equity into the next property, hopefully putting 5% down and having my next property be my primary residence and house hack (Duplex/Triplex).

But the mortgage officer/branch manager, said that my next mortgage wouldn't qualify as my primary residence, and that I would need to do an investment/commercial mortgage (I couldn't remember his exact terminology), unless the first one was paid off (which sounds crazy to me).

He suggested that I use cash for a downpayment on my second mortgage (which would have to be 20-25% since its an investment property), and do a HELOC on my first mortgage, for repairs or if I needed a little to cover the downpayment.

I am sure I can go that route, but I wanted to get the BP community's thoughts and advice if there is a possible way to get this second mortgage as my primary residence. Or should I just bite the bullet and do the second mortgage as an investment property?

Thanks in advance!

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  • Tom GimerBusiness Member
    DMV · Member since 2017 · 3k+ posts · 3k+ votes
    9y

    Having a friend move in with you didn't transform your property into an investment property.

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  • Chris Duvall
    Investor · Nashville, TN · Member since 2014 · 8 posts · 3 votes
    9y

    Not 100% on the answer, but their reply doesn't sound like the best option. It'd be good for more experienced members to correct me if any parts of this are wrong.

    He's a portfolio lender so I guess he doesn't have access to standard loans like a loan officer would. If you go to a loan officer, I think you can qualify for a new primary residency with most standard loans (fha, fnma, fhlmc, and va). This is with the caveat that you listed the residency as a investment property on your taxes last year.

    If you haven't lived in a property you own for 1-2 years (and it helps if you filed taxes stating that what was once your primary residence turned into an investment property), you will have the option to get a new loan as primary residence. 

    Otherwise they might force you to qualify your new loan as an investment property, which wont offer as good of rates, the cash to close is typically higher, and it's harder to qualify. A VA loan might do 100% (or more) financing, FMA something like 3.5% down, and then probably 5%+ for FNMA and FHLMC. (I'd double check this, but a loan officer will tell you it all for free).

    One option would be to cash-out refinance the investment property and use the funds as a down payment on the new property. 

    If you can avoid getting a PMI on your new loan It would be a great option (usually that's by putting 20% down, but there might be other ways).

    One down side of the property you own being an investment property is that the mortgage companies will give you a worse LTV (Loan To Value). A primary residence will allow you to take a lot more money out in a refinance than an investment property. For an example, a primary residence may only require you to own 10% of a home while an investment property requires you to always own at least 20% after a refinance (those aren't accurate numbers, just used as an example). But again, taking out a loan to purchase a primary residence is way preferable to trying to take one on an investment property.

    If you're going to a lender instead of a loan officer because of your debt to income ratio, sorry! I don't have a solution to that. 

    Listing the home as an investment property allows you to consider rental income as part of your DTI (debt to income) while traditional lenders don't accept house hacking (but small lenders and community banks often will).

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  • Chris Duvall
    Investor · Nashville, TN · Member since 2014 · 8 posts · 3 votes
    9y
    Originally posted by @Tom Gimer:

    Having a friend move in with you didn't transform your property into an investment property.

     He moved in with a friend, not vice versa.

    0Reply
  • Samuel Vogt
    OP
    Pittsburgh, PA · Member since 2017 · 36 posts · 23 votes
    9y

    @Chris Duvall great insight.. I need to check with my accountant to see how my taxes were filed, and then maybe get some insight from him as well. 

    I was thinking that an FHA might be the best option moving forward, but I hear that they are cumbersome.

    I am trying to weigh the potential upside of doing that second mortgage as a straight investment property. My thinking is that it builds report with this small portfolio lender so that they trust me long term.

    I am still about 6-8 months out from having the capital to purchase, but was thinking about doing some things to help the lender build trust with me.

    - Opening an account and making a sizable deposit every month as I accumulate capital 

    -Opening a HELOC now with the lender, but not tapping it

    - Refinancing some student debt with them as well

    Thoughts on this strategy with the lender? Do you think these things will make a difference?

    1Reply
  • Tom GimerBusiness Member
    DMV · Member since 2017 · 3k+ posts · 3k+ votes
    9y
    Originally posted by @Chris Duvall:
    Originally posted by @Tom Gimer:

    Having a friend move in with you didn't transform your property into an investment property.

     He moved in with a friend, not vice versa.

    Just re-read -- appears accurate. I thought he was mistaken on his primary/investment situation. 

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  • Chris Duvall
    Investor · Nashville, TN · Member since 2014 · 8 posts · 3 votes
    9y

    I don't know enough to really comment on most of that. Why are you using a local lender over a loan officer? How many lender's have you talked with? It sounds like you've just talked with one which doesn't really give you a clear picture of the issues. Has the lender said these things will build trust? I wouldn't pay for a HELOC just on the off chance it might impress a lender.

    Accumulating capital is always a good thing. Showing the ability to accumulate capital is considered a mitigating factor in judging whether someone is credit worthy for a traditional loan (fha, fnma, fhlmc, and va) but I don't know how other lending works.

    I mean, what did the guy you want money from say you have to do to get money? 

    If I were you, I'd get all my ducks in a row. I'd DEFINITELY know how I filed taxed on my properties. I'd know my cash on hand, and my debt to income ratio, and what kinds of debts made up each section. 

    I'd know how much equity I had in my home, roughly the appraisal value of the home, and how long I'd had renters for. I'd also be able to document the renters (rental contracts, xyz). 

    Then I'd find a friend who knows a lender, I'd call the lender and tell them I wanted to buy them lunch and pick their brain on some investing questions. 

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  • Chris Duvall
    Investor · Nashville, TN · Member since 2014 · 8 posts · 3 votes
    9y
    Originally posted by @Tom Gimer:
    Originally posted by @Chris Duvall:
    Originally posted by @Tom Gimer:

    Having a friend move in with you didn't transform your property into an investment property.

     He moved in with a friend, not vice versa.

    Just re-read -- appears accurate. I thought he was mistaken on his primary/investment situation. 

     Regardless, If he doesn't know whether it was filed as an investment property.. it probably wasn't and you are likely right in the end.

    0Reply
  • Samuel Vogt
    OP
    Pittsburgh, PA · Member since 2017 · 36 posts · 23 votes
    9y

    @Chris Duvall the property was used for a non-profit, so I am not sure if that classifies it as an investment property and am unsure of how my accountant classified it.

    There are a lot of moving parts, but you are right. I need a clearer picture. Finding a friend who knows a lender and buying him lunch is a good start.

    I have only talked with one lender so far, since this was day 1, and I plan to talk to more, but one thing that I have heard time and time again from the BP community is that portfolio lenders are the best to deal with.

    I know all of the things that you suggested (Cash on hand, debt to income ratio, appraisal value of home, equity available, etc.) and showed him everything today at the bank. 

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