Can I Rent Out My Upside Down Home and Buy Again?
Posted on 25. Apr, 2011 by Scott Schang in Buy Again
Falling home values and record low interest rates make this an incredible opportunity for many homebuyers.
What if you are a home owner now and you want to take advantage of this opportunity to move into a bigger, better or newer home with a lower interest rate and a lower mortgage payment?
Selling the home is not really an option if you owe more than the home is worth. The only way out of this situation is short sale or foreclosure.
Obviously, short sale or foreclosure prevents you from buying again for at least 36 months (if buying using an FHA loan)
Can you rent out your upside down home and buy a new home?
The short answer is “Yes”….but there is a catch.
In the past, lenders could use a rental agreement to offset the mortgage payment on the rental home – all of that changed in 2008.
A new guideline was designed to keep people from “claiming” to rent their current residence to buy a new home, then let the original home go into foreclosure – many were gaming the system.
If you have less than 25% equity and you are using FHA, or 30% equity if using a Fannie Mae conventional loan to buy your new home you must qualify for the full payment on both the current and new homes.
This makes if very difficult because most families cannot afford both mortgage payments. Even though you are receiving rents – you can’t use that money to qualify for the new purchase.
If your current home is not upside down, there are options.
If you do have equity in your current home, and you are looking to purchase a new home – you may use a portion of rents to offset the current payments, but it’s not black and white.
If you have questions about renting our your home to buy new a one, leave your question or comment below and I can address your specific situation.
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31 Responses to “Can I Rent Out My Upside Down Home and Buy Again?”
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Scott,
I have thought about doing this, renting my upside down house to cover a good portion of the mortgage payment. The difficulty is – where does my family live? Instead I have started not paying the mortgage and property tax. We are still living in the house and are now awaiting ING to reconsider their options for us. As a paid in full property ING offerred no help whatsoever, just the threat of a ballon payment over $120,000 and an increase of two percentage points on the existing mortgage. Why would I do that?
I really wish lenders would be more consistent with how they work with folks – you shouldn’t have to be in a position where you have to “get their attention”. Being faced with a balloon payment while the home is upside down is a situation that they should probably help with! Thanks for your comment Tony, keep me informed.
I tried to refiance my current home that was included in bankruptcy (discharged in 2006)with my current mortgage holder, my credit was good (around 650) but because I obtained new credit in 2008 they denied me stating that i must be 4 years out of bankruptcy (its been almost 5) and since i obtained new credit (car) in 2008 i have to wait another year?? what does new credit have to do with my bankruptcy? I talked to another finace company and they stated “when you include your home in a bankruptcy its considered a forclosure” what?? i still live in the home and make timely payments. we thought about renting our property (already have someone thats interested)and buying new (we are not upside down on our home, there is plenty of equity). is there any help for our situation? thank you!
Hey scott,i have a home that i just filed chapter 7 bankrupt on. Discharged in august .I currently have a section eight tenant in the property .I did want to keep the property as an investment and buy again in three years,but after reading your comments i don’t know if that’s possible .the rent on the rental leave me with a negative balance of $45.00 to cover on the mortagage every month.that may change in the future.Should i be mean and kick the people out to ensure i’ll be able to buy in three to five cause i have an fha loan and they might take awhile to foreclose on meaning i’m current. what should i do i’m confused about all this?
Hi Shaune,
That’s a decision you and your family, your cpa and maybe even a real estate attorney should be involved in.
I cannot help you decide whether or not to keep the property
I did want to clarify something you wrote – “I did want to keep the property as an investment and buy again in three years” – If you continue to make payments on the investment home and do not go delinquent or foreclose, you would have to wait a minimum of 4 years to buy an investment because you can only use conventional financing for non-owner purchases. Here’s an article I wrote about waiting times: http://www.homeownershipuniversity.com/home-buyers/buy-again/how-long-do-i-have-to-wait-after-a-bankruptcy-short-sale-or-foreclosure/
If you short sell or allow the investment to foreclose, your timelines are different than if you just did the bankruptcy.
This can get pretty confusing, I hope this is helpful – let me know if you still have questions!
Hi Scott,
I relocated because of a job recently. I have rented out my house in the prior location and would like to purchase a new home in the next few months in the new location. Current prior mortgage is FHA and I do have equity but not 25% more like 12%. I have read conflicting information in regards to this. Will I be able to get another FHA loan and will they count the rent funds I receive? If not like most people I cannot qualify with the 2 payments. Thanks for your help.
Hi Joy,
There may be some additional paperwork and documentation but FHA does allow you to use rental income to partially offset your current mortgage on the rental property in the case of being relocated by your employer. Here is the FHA guideline:
• Relocations: The homebuyer is relocating with a new employer, or being transferred by the current employer to an area not within reasonable and locally recognized commuting distance. A properly executed lease agreement (i.e., a lease signed by the homebuyer and the lessee) of at least one year’s duration after the loan is closed is required. FHA recommends that underwriters also obtain evidence of the security deposit and/or evidence the first month’s rent was paid to the homeowner.
What State are you in? The next step is to simply crunch the numbers and see exactly what you’re options are. If you’re in California, I would love to take a look at this for you – if you’re not in CA, and if you’re not already working with a lender, I may be able to give you some names of folks I trust.
Hope this helps?
Thanks Scott,
I’m in South Florida and probably will not start the process till Aug 2012 but if you know anyone down here I’ll definitely take their names. Thanks for your insight.
Let me know when you’re ready to start looking and I’ll be happy to give you some names.
Scott- one other inquiry. If I refinanced my rental property do you think that would endanger me being able to get a mortgage in 6-8 months? I know I can get a better rate than I have now but I don’t want to cause an issue down the road. Also if I refinanced on a non FHA loan would that help my chances for the new loan so I wouldn’t have to deal with the 2 FHA loan issues? That’s again for your insight.
Hi Joy, refinancing your rental property should not endanger you from getting a home loan in the future. If anything, you would reduce your interest rate and payments, which would actually help you to qualify.
Yes, refinancing out of the FHA would help if you plan to buy again using FHA financing. Hope this helps?
Thanks Scott, I am going to refinance but will do it FHA streamline since there would be too many out of pocket expenses to get it off FHA. I’ll just have to roll the dice and hope they don’t act up too much when I try to get a loan for my primary residence. Thanks
Sounds like a solid plan Joy!
Everyboby tells me you cant have 2 FHA loans in GA is that try had somebody else tell me you could also we qualifyed for another home as well and have a company who will lease out current for 6 years guarntee payment even if vacant…please help we need to move!
Hi Theresa,
While it is true that FHA only allows you to use their loan for a primary residence, and therefore you “should” be limited to only one FHA loan at a time. There are exceptions to this rule however. If your family has grown, or decreased (kids leave home) or if your employment has changed and you must move to accomodate the commute.
The bigger challenge you may have is qualifying for the new home if you already own a home and have no history as a landlord.
What city/state are you in? Let me put you in touch with a lender that will take the time to go through this and explain all of your available options.
Any idea how this might work with a VA loan? I currently have a property that is underwater by about $50K, but because of the financing I put in place before I filed for bankruptcy, the mortgage payment is very low and it generates positive income to the tune of about $1,000 a month, after all PITI and maintenance expenses.
The VA underwriting handbook states that rental income from property not securing the VA loan can be counted provided the borrower has three months reserves to cover PITI. It also states that depreciation expense can be counted as income. While I may not need it, I’d like to include it to make the loan package as attractive as possible, but I really don’t want the fact that I’m trying to keep this property and pay the mortgage instead of letting it go into foreclosure count against me, so any information related to this is appreciated.
The property has been rented out for the last 18 months and the tenants want to renew for multiple years now.
I’m coming up on 2 years post bankruptcy discharge shortly and really would like to purchase a new home in our new city.
Hi Steve,
The loan on the home that you’ve rented out, was your VA benefit used to purchase that home? Do you currently have a VA loan on that home or are your intentions to buy a new home using a VA loan? Once we work through any prohibited actions as defined by VA or FHA, the next challenge which is establishing a history as a landlord (tax returns showing income from investment property) and determining what portion of that can be used to offset the payments on the rental home, making it easier to qualify for the new home.
One last question, was the mortgage on the rental home ever delinquent prior to, or up to the date of the bankruptcy?
Feel free to give me a call on this one – there are too many factors to give you a yes or now type of answer to your questions. You can reach me on my cell at 714-336-8286
Scott, thanks for the response. I’ll call to follow up but since I’ve learned a lot by reading others postings I figured I’d respond here as well.
The loan on the currently rented house was not a VA loan. My intention is to buy a new home using my VA entitlement. The rental property loan was 60 days late, once, in Apr 09, but not since then. It is a HELOC (based on the 30 day LIBOR plus a margin of .55, so the current effective rate is less than 1%.) The loan has another 6 years to go before it starts to amortize. It is rented for $1,600 monthly, the mortgage payment is generally less than $350, and I pay the property tax and insurance separately, $4,600 and $800 annually. Calculating depreciation expense into this puts us at least $1,000 a month to the good.
I do have a history as a landlord going back to 1995, but lost a rental property to foreclosure in Sept 09, (BK filed in Oct 09, discharged Feb 10.) That house was originally purchased with a VA loan but was subsequently refinanced with conventional financing. I have since obtained a new certificate of eligibility from the VA showing the full entitlement. My tax returns will show rental income continuously from 1995 forward.
If I can’t use the rental income to qualify for a new loan, I’m probably still able to afford a home in the price range I want. My combined household income is in excess of $100k not counting the rental income, and the only other debt we’ll have is a car payment that will end in May of 2012.
I really just want to make it as easy as possible for the lender/underwriter to approve.
It sounds like you’ve done a great job understanding the process for your specific situation. I do not see any challenges based on the timelines and information you’ve given above.
Steve, thank you for leaving your response here as well. It is very helpful to others to see this type of conversation around these topics. I really appreciate your contribution here.
Like others, I have been getting conflicting info on how to buy a second home while renting the first. I have an FHA on my primary, and am seriously upside down (so, no 25-30% equity here)….but go figure the new & “improved” HARP will not work for my loan situation since its not backed by Fannie or Freddie. So I decided to try holding on to the home in hopes for a better future alternative. I’ve decided to rent it out since all other options have been exhausted short of walking away which I don’t want to have to do.
I’ve been denied by other lenders for the second home loan due to my situation although it’s clearly not unique. Do you have any recommendations for lenders in GA familiar with this? I feel like I’m being pushed by all sides to walk on my first, but I don’t want to do that unless absolutely necessary. If I have someone willing to cover my first home’s monthly payments, it seems as though I shouldn’t have to resort to such drastic measures.
Hi Noelle,
In order to avoid having to qualify with the full principle, interest, taxes and insurance payments for both homes, you need to establish a history as a landlord. Typically, this requires showing two years tax returns reporting rental income. There may also be a requirement to have a certain number of month’s reserves – it’s an automated underwriting system that will assess the risk level based on your income, credit, reserves and history as a landlord – this system will analyze your specific situation and ask for reserves or other conditions before approving you for financing.
Unfortunately, many folks bought new homes and allowed their current home to go into foreclosure back in 2008 which resulted in the “Buy and Bail” guidelines we are stuck with today. Another example of how a few bad apples have made it harder on the rest of us.
Hi we are in a pickle.
We live in a 1200sq ft condo 3 bdrm 2 adults 6 kids!!!!
We need to move but we are upside down 50000
To rent elsewhere bigger would not be affordable. But we would be able to afford a mortgage pymt for a bigger home. We obviously would have to buy to move and afford pymt. What can my options be at this point . We are feeling a little desperate
Hi Sandy, thank you for your question, first, I have a couple questions for you before I can accurately offer any advice about your situation. Have you had any late payments on your current mortgage/mortgages? Second, how long have you had the home…how many kiddos ago? Let me look into this a little more on Monday morning, I want to see if there are any options that i’m not thinking of right now.
This is a difficult situation, I understand. If you are confortable, it would be great if you could answer my question here, that way it may help others that are in a similar situation. If you prefer to contact me privately, you may email me at [email protected]
I havent checked back for an answer in a few weeks thnx for taking the time 2 help.
Well To answer your quetions:
We have lived here for 10 years
No late payments
we only had 1 child then,now we actually have six and one on the way!!!! (2 of the kids are not ours but we are raising them)
we have a fannie mae loan
income=56k
credit=good
debt=0
Scott,
I’m located in West Palm Beach and would like you recommendation on a good lender in the area. Please advise..
Thanks,
Charles
Absolutely Charles, send me an email when you’re ready to buy again!
Hi Scott. My wife and I purchased our first home (condo) in 2008 with an FHA loan. We have since had two kids and are in the process of completing the FHA Streamline Refinance. We are at the point where would like to start thinking about our next place (hopefully much larger). I think we have somewhere around 5% equity in our place but who knows. There are some members of the condo association who rent out their condo. This seems like a good idea given the low interest rate we are locking in. Can my wife and I qualify for another FHA loan while renting out our condo? IS there another type of loan we should look at? Any idea of how much of a down payment we should be setting aside for home number 2? We have very good credit and no debt (other than our current mortgage and ridiculous daycare bills). We are trying to come up with our plan (maybe over the next year or two?) and would love any insight on rent vs buy and any other thoughts you might have. Thanks
Hi Morgan, typically FHA will only allow you to have one FHA loan at a time because they only lend money to people that are living in the home they finance. There are exceptions though, and what you have described is exactly the circumstance by which they would allow you to buy a new owner occupied home using FHA financing.
You will have to document the need to “move up” into a larger home due to the children. I don’t think you’ll have any problems at all though – I’ve seen this exception before.
The down payment and interest rates are the same for all FHA financing – 3.5% down payment is all that will be required.
The biggest challenge you may have is qualifying for the new mortgage. Because you have less than 30% equity in the home and do not have a 2 year history as a landlord as evidenced by your tax return schedules, you will have to qualify for both payments. Old guidelines allowed us to offset your old mortgage payment with the rents received, but that is no longer allowed.
You would now have to qualify for both payments.
Hope this helps?
If you are in California, we are a direct lender and I would be happy to review the numbers and give you an idea of what your options might be.
That is very helpful. We are in Portland, Maine. Thanks for your insight.
I need some guidance here on this. Back in 2003, I filed BK. Had two mortgages on my home in IL – First with FHA and Second with Non-FHA. Both were included in BK, and, I never reaffirmed. That said, I have always been making payments on time or better all this time.The economy being what it is, I have had to gain work out of state some 2000 miles away. Leaving behind in my home is my elderly mom and disabled son. Both live back in Illinois. Now all this time later I am back on my feet, but, in another part of the country. I do not want to lose my house in IL. But, I also live far away now. I want to rent my house in IL – the house is not under water, but, there is no real equity either. So, can I rent it to someone. As I said, I have not reaffirmed. Will FHA or the lenders have a problem if I am not living there? Will I be able to get another FHA in my neew state? Save my life and help me please… Vince
Hi Vince,
You can certainly rent your home out in IL and buy a new home. You are still the owner of the home and as long as you’ve kept up on your payments, there is no fear of the lender foreclosing. Including your mortgage in bankruptcy does not mean the home is no longer yours.
You shouldn’t have any challenges getting FHA financing, although it may require an explanation about why you already have an FHA loan. The only challenge you might possibly encounter a guideline called “buy and bail”. This guideline was created to prevent people from buying a new home at a lower price, then letting their old home go into foreclosure. The guideline requires that if you have less than 30% equity in your current home (in IL) you must qualify for both principle and interest payments for both homes.
IF you rent the home in IL out and report the rental income on your tax returns for 2 years – then you can use the rents to offset your payments, which will make qualifying easier.
If you have any further questions, feel free to call me tomorrow on my cell phone 714-336-8286. What State are you planning to buy in?