Would buying a STM impact my ability to get a primary residence?

Question

My husband and I are thinking of purchasing a STM. We currently own a primary residence, but we plan to sell it and buy a bigger home in a couple of years. I'm concerned that buying a STM would impact our credit and DTI, and thus result in a higher interest rate for our future primary residence. What are your thoughts?

John Underwood · Answer

It definately could effect that.

If you have the STR for a year or two you should be able to count about 75% of the income so it would hurt you too bad.

If you are planning on buying a new primary house within 12 months of buying the STR then I would buy your new primary residence first.

Patricia Watson · Answer

This is all very helpful. Thank you!

Jonathan Bombaci · Answer

Definitely talk to a lender about it and see what they have to say but yes it could impact your DTI either positively or negatively. As @John Underwood mentioned they should be able to count 75% of the monthly income generated from the property and if that more than covers the properties carrying costs then it would actually improve you DTI %.

You wouldn't be buying something to lose money right? So assuming you buy it right and you have 2 years to stabilize the income. If the net average is positive it shouldn't adversely affect your ability to lend. If it doesn't look like it is going to work then you can try to convert it to a LTR to cover the carrying costs or sell it.

All that being said since you're on this site and asking good questions I'm assuming you are saving a good amount of money now and have excellent credit. You'd probably be able to afford upgrading your primary residence and owning a small vacation rental somewhere, now throw in some extra income from that vacation rental and you should be in pretty good shape.

The DTI % banks use is pretty high, if you cap it out then you're probably over-leveraged and should review your financial position. Most of the people I talk to off biggerpockets get preapproved for more than they need and then we end up shopping for something that is quite a bit less. If you're in a similar position then you'll have plenty of headroom to try a good STR and you won't really impact your ability to upgrade your primary residence in a few years.

These are just assumptions but going back to my first point - talk to a lender with a rental/commercial background. They can look at your specific financial position and advise you accordingly, but I think you'll find out you're going to be fine.

Best of luck, and let us know what your lender says since I'll be curious!

Jon

Would buying a STM impact my ability to get a primary residence?

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