For every homeowner who is upside down on their mortgage, this is for you.
An upside down mortgage is when somebody owes more on their mortgage balance than their home is worth, hence the term underwater. People who are underwater on their mortgage have limited options unless their mortgage loan is owned by Fannie Mae or Freddie Mac. Whether their loan is owned by Fannie Mae or Freddie Mac doesn’t change the fact that this real estate market is a fantastic opportunity for purchasing real estate.
Buying a house even though you are underwater, is no easy task, but it’s doable, it just has to make sense.
One of the guidelines that changed for mortgage loan underwriting was the buy and bail tactic that borrowers began taking advantage of. You would have a scenario where John and Susie homeowner were upside down on their mortgage and they would go obtain a new mortgage and use the rental income to qualify on the primary residence they were turning into a rental for income qualifying purposes for their new property they were going to occupy. As soon as they occupied that new property they would simply walk away from the other property, hence the term buy and bail…
So the question still remains how do you purchase new property if you are upside down on your present property?
Well this depends on many factors, such as proximity of the new property in relation to the property to you presently own as well as the motivation for purchasing the property.
So if you’re trying to get to obtain a Sonoma County Home Loan be mindful of the following items:
- Is the new property you’re purchasing bigger or smaller than the property you presently own? If the property you are purchasing is bigger and you are upgrading this is a good sign. For example going from a three bedroom two bath property to a four bedroom three bath property.
- How close is the new property you’re purchasing to the property you are subsequently renting out? This is a big factor especially if it’s a primary residence transaction. More on this later.
- What is your cash position like to purchase this new property? In other words, if you are using a low down payment mortgage like an FHA loan to purchase this property, you are going to have a more difficult time purchasing this property because FHA is very particular on these types of scenarios.
- Do you have a landlord rental history for the last 12 months or longer? Some mortgage loan lenders require this, choose your mortgage lender wisely. Ask them upfront if this is a guideline of theirs.
Now that we have some general considerations out of the way let’s look at the guideline more closely. The buy and bail guidelines have been revised to prevent homeowners from purchasing property and bailing on another one. For mortgage loan underwriting purposes, rental income on the property that is being vacated and turned into a rental cannot be used unless there is a minimum of 25% equity in that property. If there is a minimum of 25% equity in the property, 75% gross rents can be used for income qualifying purposes.
If there is not 25% equity in the property, then the borrower needs to have enough gross monthly income to support all revolving monthly unsecured debt and both total house payments.
Buying a property with a mortgage loan even though you are underwater, can be done.
The most efficient way of doing of securing mortgage loan financing is to put 25% down on the new property and purchase it as an investment property.
There is no guidelines about purchasing an investment property with 25% down with buy and bail. Moreover, the gross rental income via a comparable rent survey can be used for loan qualifying purposes. This means if you’re needing to get a mortgage loan preapproval for Sonoma County, you can do it with ease.
Q: If I buy a new property with 25% down as an investment property how do I qualify?
A: Each mortgage loan scenario is different. So nobody can just blanket qualify, however if you are putting 25% down and you’re buying a property as an investment property you more than likely will be able to have that mortgage loan scenario work assuming all the other factors are in place such as income, credit and assets. Most of the time mortgage loan lenders prefer you to have at least six months of mortgage payments saved in the bank as reserves.
What if I’m buying a new primary residence?
This becomes more difficult, but potentially doable provided you meet certain criteria. If you are upside down on your present home, and want to buy a new primary residence and you have enough monthly income to support both house payments as well as any other monthly debt you might have, you might want to consider buying up- purchasing a larger home with more square footage etc. This goes in lockstep coordination with your motivation to purchase this new primary residence. It will look significantly better if you also have at least a 10% down payment if not 20% down to be able to purchase the new property as a primary residence. Additionally, you will have to have at least six months of mortgage payments saved up in the bank for both properties.The lender might also require a full appraisal report on the property that’s being been vacated and turned into a rental.
Buying a property even though you are upside down must make sense.
Mortgage lenders and even mortgage loan underwriters today are looking at every mortgage loan with a fine tooth comb. They want to be able to write loans that make sense. So get a rate quote and begin the process.
If you can justify the purchase of the new property, that’s what mortgage lenders are looking for. You could also simply purchase the property as an investment property. Discover how to buy another home even if you are underwater on your present home.
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