The Veridian Blog

Q: “If I can afford to keep both mortgages at the same time and rent out my current home, what problems may arise during the loan process for the new home?”

A: In no particular order, here are some possible issues that an underwriter may condition to be satisfied prior to signing in escrow:

1.      Down payment:  Because most people must sell their home before purchasing another, the source of your down payment on the new home will be highly scrutinized.  In addition, you will still need to come up with a minimum of 20% for conventional loans -  a tough task in the Bay Area when you decide to keep both homes.

2.      Rental Income: In the past, the underwriter would require substantiation via rental agreement and probably also a copy of the cancelled check for the security deposit or first month’s rent.  Beginning in 2009, Fannie Mae requires a minimum of 30% equity in order to factor in rental income into the debt/income qualification ratio, so an appraisal might be necessary.  This year, some lenders have tightened even more and are requiring a 6-month seasoning period before using rent and/or a history of rental management.

3.      Note and DOT for existing mortgages: Nowadays more than ever, lenders will condition for the Note on existing mortgages to ascertain the exact terms of the loan.  Most, if not all, disallow interest-only features, negative amortization language, prepayment penalties and acceleration clauses. 

4.      Mortgage Payment verification:  You will be required to provide a Verification of Mortgage (VOM) or payment history, or cancelled checks for newer mortgages.

5.      Heloc Premium: For borderline situations, underwriters may require higher qualification standards on existing lines-of-credit.  Because they are based on a variable rate that can fluctuate at any time, a conservative, higher qualification rate, usually 2% over the starting rate, will be used in calculation income qualification and that will increase your debt-to-income ratio.

This additional paperwork is required after income is first established to qualify for both mortgages.  If you don't have the required income to begin with, then this analysis is moot.  But it is becoming more and more apparent that lenders do not like to see homeowners straddling loans while looking for a new home.