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% -  a tough task in the Bay Area when you decide to keep both homes.

2.      Rental Income: The underwriter will require substantiation via rental agreement and Schedule E from the 1040 tax return and probably also a copy of the cancelled check for the security deposit or first month’s rent.  Fannie Mae also requires a minimum of 30% equity in order to factor in rental income into the debt/income qualification ratio.

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, negative amortization language, prepayment penalties and acceleration clauses. 

4.      VOM or payment history, or cancelled checks for newer mortgages.

5.      For borderline situations, underwriters may require higher qualification standards on lines-of-credit.  Because they are based on a variable rate that can fluctuate at any time, a conservative, higher qualification rate will be used in calculating income qualification and that will increase the 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.