Best way to finance 2nd home while renting out 1st home?

Question

Scenario,

I live in a new build $500k ($100k equity) primary residence for one year and rent it out with complete success right after moving out. Now I need to buy a second home that is intended to be my primary residence for the next year. I now cash flow on the first $400k mortgage $200/mo, have no expenses/bills/other loans, good credit, and net >$10k/mo wages. What’s the best way to finance a second conventional loan? What are the banks financial requirements for loan approval while holding the 1st mortgage? Does the second loan consider a different debt/income ratio?

Nick Belsky · Answer

@Tyler Clark

Sounds like @Logan McKay Zylstra nailed it.

Fannie/Freddie allows you to carry up to 10 mortgages on your personal credit profile. That is a hard cap. Many investors choose to begin blending property loans with commercial lenders at some point as they grow. Normally you will top out your DTI before you reach your 10 but it could go either way. Commercial and some Non-QM lenders do NOT report to your personal credit report. You can always refinance your investment properties later to "free up" slots if that becomes an issue for you.

Once you moved out of your primary, it became an investment. Nothing will change on it unless you refinance it. If you do, then you will need to claim it as an investment and not a primary.

Cheers!

Logan McKay Zylstra · Answer

Good question. I am not a loan professional, but I feel educated enough to speak on this. The best way to finance a second conventional loan is the same process as how you got your first one. You will be occupying the property so you can get a primary residence loan (lower interest rate compared to an investment property).

When getting the loan for your second home, they will only be able to count 75% of the rents in your first property. So you will likely be looking at that first property as a net negative on paper. However, you have a good income so I don't see that being an issue for you when it comes to getting approved.

I'm sure most lenders would be happy to provide value to you and help you with your situation in order to try to win your business.

Best way to finance 2nd home while renting out 1st home?

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