I own a home and my boyfriend owns a home and we both want to buy a new home together. We would like to keep both and rent them out but we have no idea what the guidelines are to do this.
Do we have to place both homes under an LLC? Does the bank have to have proof of rental income before we move forward?
What do we do? What are the steps we need to take to get there?
First step is to talk to your financial advisor and your attorney about prenuptual agreements to keep your separate assets separate just in case the marriage does not work out.
As far as the lenders for your current homes are concerned, you need not do anything. The lenders won’t require you to change how you hold title should you decide to convert your homes to rental properties. As long as you keep current with the mortgage payments, the lenders won’t care.
Since your individual properties are not currently rented, you have no proof of rental income to give the lender. Because you do not intend to sell one or both properties, the lender will look at your debts and incomes to see if you have the capacity to carry three mortgage payments with no rental income.
Next step is to talk with the residential loan officer at your favorite bank to see how much loan you qualify for, then limit your housing search to properties you can afford.
Once you know your borrowing power, then you can take steps to acquire a new home and convert your current homes to rentals. I leave it to you to determine where in the sequence of events you get married.
Unless you have at least 30% equity in each property you will have to qualify with all three of the payment WITHOUT the benefit of any rental income (should you get them rented before closing on your new home). New guidelines were put into place last year in regards to this.
futureplanner,
Could you both live in one of the homes while you rent the other out? Get a track record with the rent. Then next year, get a new home and rent out number 2. It won’t be such a risk that way.
Since your homes are already furnished, why not try to rent them that way?!
Furnishedowner
Seems like there are more and more guidelines making it hard to make money on rental property.
Is the 30% based on an appraisal of the property or do you have to have put 20%+ down and then make payments until you have 30% equity in the property?
I was wondering about this as well using rental income to qualify for a personal residence, but I guess you can’t do it unless you have 30% equity.
The way I understand it, you have to show the rental income on your income tax return as income, then the lender can use it to qualify you.
That’s why I suggested moving into 1 home, and renting out the second home. Then next year, look for a new home and rent out #2. You will get there, you just may have to go a little slower than you wanted to.
Will you have a positive cash flow on the homes? What is the mortgage payment, taxes, insurance, etc. What are market rents?
Furnishedowner
If you are converting your CURRENT primary to a rental you have to have the 30% equity to be able to use the rental income. If you currently have a rental and want to use the income you either have to have it reported on your most recent tax return, or if you have purchased the property in the current tax year you can provide a lease AND a cancelled copy of the rent check.
Fannie/Freddie AND HUD put these guidelines in place because people were saying they were renting out there current primary, purchasing a new home at current values (after all the recent value drops) and then walking away from their old primary (purchased before the recent value drops and most likely underwater).
Thank you for the clarification on that , it is helpful.
When using rental income to qualify is it still 75% of gross rents minus - Payment ,Interest,Taxes and Insurance = the amount that can be used to qualify for another property?
Thanks
Lenders don’t qualify you for a property. Lenders want you to qualify for a loan which you may use to purchase property.
Your Debt to Income Ratio is the main factor that will disqualify you for a loan. If your DTI is too high, the rest of your financial statement does not matter. In the past, compensating factors such as high net worth and high liquid asset could be used to compensate for a high DTI, but not any more.
In computing your DTI, your rental property either generates income or is a liability. To figure out which, start by adding up your monthly recurring fixed expenses for your rental property – usually PITI, HOA/COA, and any scheduled special assessments. The total of your monthly recurring fixed expenses for the rental property are subtracted from 75% of the scheduled monthly rent. If the answer is a positive number, then that number counts as income in your DTI calculation. It the ansewr is a negative number, then that number counts as a liability in your DTI calculation.