In today's real estate market, some people are buying a second home to use as a primary residence. Low housing prices, low interest rates and tax incentives all have some homeowners jumping in for another home. The buyers' market can make it difficult for people to sell their first homes. There are options for those who want to purchase a new home to live in and rent out their current home.
Renting Your Home
Renters are on the rise since so many have lost their homes due to foreclosure and bankruptcy. These families are looking for a home to rent. If you choose to rent out your home in order to buy another, there are some factors to consider. There may be tax consequences depending on whether you are making a profit. If you are not, you can write off the loss. You can also write off repairs. You may choose to use a property management company in order to ensure you have qualified renters and you don't have to worry about the repairs.
Getting a Second Mortgage
If you want to buy another home while you are still carrying the mortgage on the first home, you will need to have your ducks in a row. You will want to have cash reserves available so you can make repairs on the other home or cover the mortgage between renters. You will need to have a renter sign the lease prior to your getting another mortgage. Lenders are wary of borrowers who show fake leases, get a mortgage and immediately foreclose on the first home. So, you want a legitimate lease drawn up, showing a security deposit from the renters.
In today's economy, there are strict requirements for those claiming to be renting out one home and buying another. If you are getting a conventional mortgage, you will need to have a signed lease, plus 75 percent equity in your first home. If you do not have 75 percent equity, you will need 6 months PITI reserves on the first house and six months PITI reserves on the second house. "PITI" refers to principal, interest, taxes and insurance. So, in essence, you are required to have the entire mortgage payment for six months for each home. Plus, you will need a signed lease with proof of a security deposit.
As of 2009, the Federal Housing Administration (FHA) will no longer count any rental income on your application for a new home. Therefore, you must qualify for both mortgages without the rental income. Your debt-to-income ratio cannot exceed 41 percent, and that will need to include the mortgages on your first and second homes. If you are going the FHA route and are having trouble with your ratio, try paying off some debt like that on credit cards or car loans before applying.