Many people would like to take advantage of the current low real estate prices and interest rates and rent out their current primary residence and buy a new primary residence. Especially with the $8,000 home buyer tax credit expected to be expanded Friday to include move up buyers. However the lenders have created some rules around allowing this that I will outline below. These rules apply to both FHA and conventional loans.
Basically, when you apply for a FHA loan or conventional loan and you want to rent out your current residence and buy a new primary residence, you must be able to qualify with both housing payments included in your debt-to-income ratio. There are two exceptions below that would allow you to count the rent if you are able to rent your current primary residence before you buy a new one:
1. Job relocations. If you are being relocated with a new employer or being transferred to a new employer you can use the rent from the house you are vacating to help qualify. But you must have a one year lease in place and evidence that a security deposit was paid to you.
2. Equity in property being vacated. If you have 25% or more equity in the residence you plan to vacate (determined by an appraisal or comparing the current loan balance to the original purchase price), again you can count the rental income towards qualifying for a FHA Loan or conventional loan on a new primary residence. But once again you need to have a one year lease in place and have collected a security deposit.
Now you might, ask what if you don’t fall into one of the above categories and you want to keep your current house as a rental and buy a new primary? Well, if you are able to move out into a rental property and get your current house rented for a number of months and have those rents show up on schedule E of your tax return, you have a good chance of being able to use the rents to qualify. But generally the rents have to show up on your returns.
Many times there are exceptions and further details around these rules as they are not set in stone. So please give me a call if you have questions about your particular scenario at 858-922-7899 or don’t hesitate to email me at homeloan8@gmail.com.
Warm Regards,
Rob Chomentowski
Sr. Loan Officer (and FHA specialist)
858-922-7899
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