Private Lending & Conventional Mortgage Advice

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Donnie Britton
  • Chester Co. PA
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Converting our primary residence to income property & mortgage for new purchase

Donnie Britton
  • Chester Co. PA
Posted Mar 31 2023, 11:18

We are in the market for a step up SFR, currently in a townhome. Our goal is to convert our current home to a rental give a mortgage for the acquisition of the new property.

The financing institution will accept 75% of the rental amount in DTI calculations. However, we must have a lease in place and take possession of the security deposit in order to do so.

Any recommendation on how to engage a potential tenant to sign a lease, and pay the security deposit when the unit may not be available for occupancy until several months down the road? 

Thank you in advance for your time and consideration.

Donnie

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Jon Puente
  • Lender
  • Charlotte, NC
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Jon Puente
  • Lender
  • Charlotte, NC
Replied Mar 31 2023, 12:11

Hey Donnie, 

Can you qualify for a new mortgage without having the tenant or lease agreement in place? That will buy you some time in the process. You mentioned "We" so I am assuming there are 2 incomes involved to help offset DTI ratios.

If not, can you stretch out your closing on the new primary for 45-60 days, so that it gives you time to sort out the tenant situation?  Why would it take several months to get this done, unless you need to perform upgrades/construction to your existing townhome?

Great Question!

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Jay Hurst#1 Bankers, Lenders, and Mortgage Brokers Contributor
  • Lender
  • Dallas, TX
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Jay Hurst#1 Bankers, Lenders, and Mortgage Brokers Contributor
  • Lender
  • Dallas, TX
Replied Mar 31 2023, 12:16
Quote from @Donnie Britton:

We are in the market for a step up SFR, currently in a townhome. Our goal is to convert our current home to a rental give a mortgage for the acquisition of the new property.

The financing institution will accept 75% of the rental amount in DTI calculations. However, we must have a lease in place and take possession of the security deposit in order to do so.

Any recommendation on how to engage a potential tenant to sign a lease, and pay the security deposit when the unit may not be available for occupancy until several months down the road? 

Thank you in advance for your time and consideration.

Donnie

 @Donnie Britton Has your lender told you what your debt to income ratio is without a lease?  

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Eric Greenberg
  • Investor
  • Philadelphia, PA
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Eric Greenberg
  • Investor
  • Philadelphia, PA
Replied Apr 1 2023, 06:24

Fwiw I usually have tenants sign and provide a check with 1st/last/security 2-3 months in advance of moving in.

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Theresa Harris#3 Managing Your Property Contributor
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Theresa Harris#3 Managing Your Property Contributor
Replied Apr 1 2023, 06:43

One thing to think about when converting a primary residence into a rental is how much has the value of the house gone up since you bought it?  If it went up a lot, think about capital gains.  I think the rule in the US is you need to have lived in it for the last 2 or 3 out of 5 years to avoid paying cap gains on sale of the home. 

If it is a townhouse, is there a HOA or condo board and are there restrictions on rentals.

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Alan Asriants#5 House Hacking Contributor
  • Real Estate Agent
  • Philadelphia, PA
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Alan Asriants#5 House Hacking Contributor
  • Real Estate Agent
  • Philadelphia, PA
Replied Apr 1 2023, 07:34

Seems like youre in the Phila area, if youre in the suburbs you shouldnt have trouble finding a tenant that would sign a lease and transfer a security deposit now and move in after you close on your next property. Like other contributors mentioned, see if you can qualify without the rental income. 

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Doug Smith
  • Lender
  • Tampa, FL
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Doug Smith
  • Lender
  • Tampa, FL
Replied Apr 2 2023, 06:21

I was a banker for more than a decade, but I've been lending outside of the banking world for a long time. Banks calculate Debt Service Coverage Ratios differently than "DSCR Lenders". DSCR lenders calculate their DSCR = Rent / PITI + HOA Cost. Banks add in maintenance costs, 5%-10% for management fees, and they will deduct anywhere from 10% to 25% for "vacancy". They also usually require DSCRs of over 1.25X where DSCRs usually only look for 1.0X...some will even let you go lower if you have experience. The kicker is that DSCR lenders have a Fannie form 1007 added to the appraisal to have the appraiser come up with a rent figure and they use that as the rent...without a lease in place...with no vacancy factor. Many times, banks are not the right place to get a rental loan. Sorry to interject so much that you didn't ask, but I would also look into some of the non-bank lenders that do DSCR loans. Good luck to you.

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Donnie Britton
  • Chester Co. PA
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Donnie Britton
  • Chester Co. PA
Replied Apr 3 2023, 17:51

Thank you all for your replies.

Jon - Yes, we can qualify for a mortgage w/out the lease and you are correct that there are 2 incomes.  Currently in our market (Chester Co) the inventory is still significantly below normal ranges and properties median DOM is less than a week, so we are anticipating an extended search period, which is why I mention the 'several months' time frame.

Jay - Not as yet. We are just beginning the application process and will be opening a HELOC in case we need to access some equity, prior to actually choosing which broker & program to go with.

Eric - Thank you for weighing in.  Its nice to know that this is not necessarily an uncommon practice.

Theresa - We have been owner occupants for 5 years this August, so I don't believe the capital gains would be a concern if we were to sell. We are in an HOA which does stipulate some restrictions, but we are able to rent out our unit currently.

Alan, yes western suburbs.  Chester County specifically.

Doug - Thank you for the detailed response.  I appreciate your willingness to share your knowledge.

Donnie