By guest author: Christian Durland
Here in Denver, Colorado, things have been quite exciting in the local world of real estate. While many other parts of the country are still struggling in terms of foreclosures and short-sales, and an over saturated Real Estate market, here in Denver, we’re actually enjoying some home appreciation with certain pockets of the Metro area going up into double digit appreciation rates over the last year, along with home inventories (homes currently being offered for sale) being at a 23 year low.
With all this positive news, many are now thinking that this maybe the right time to dive into Real Estate and purchase a new home, but many of those who are making this decision must also sell their current home before purchasing a new home, which is still (even though the market has “healed” quite a bit) not as easy as it once was before “mortgage meltdown” and the subsequent housing crisis of 2007-2010. Then there will be those, who will opt to retain their current home and convert it into a rental property, either by necessity, or because they choose to, however this transition may not be as simple as one might think either.
There are some rules that buyers, who will be selling their current home at the same time or shortly after they purchase their new home, as well as buyers who will be holding onto their current residence and converting it into an investment property, must follow in order to qualify for purchasing a new home. Let’s review these rules for all scenarios:
RULE: HOME ON THE MARKET AND PURCHASING NEW PRIMARY RESIDENCE
Q: What if the current home is NOT sold before purchasing primary residence?
- Must qualify with both monthly mortgage payments
- 6 months’ worth of monthly mortgage payments for BOTH homes as a “cushion”
- Can be reduced 2 months’ worth of monthly mortgage payments if current home is 70% loan-to-value (LTV) or below
Q: What if current home is sold—but NOT closed before purchasing primary residence?
- Must present a non-contingent sales contract for sold home
- Must present a lender’s valid loan approval for the new buyer
- Does not have to qualify for monthly mortgage both payments
- 6 months’ worth of monthly mortgage payments for BOTH homes as a “cushion”
- Can be reduced 2 months’ worth of monthly mortgage payments if current home is 70% LTV or below
- If sold to relocation company, copy of executed buyout agreement, client does not need a mortgage payment cushion or count current mortgage payment in qualifying debt-to-income ratios
RULE: CONVERTING PRIMARY HOME INTO SECOND HOME AND PURCHASING NEW PRIMARY RESIDENCE
Q: What if client wants to convert their current home into a second home and purchase another primary residence?
- 6 months’ worth of monthly mortgage payments for BOTH homes as a “cushion”
- Can be reduced 2 months’ worth of monthly mortgage payments if current home is 70% LTV or below
- Qualify for both monthly mortgage payments
RULE: CONVERTING PRIMARY HOME INTO A RENTAL/INVESTMENT PROPERTY
Q: Can you qualify using rental payments?
- 70% LTV ratio or less on home being converted to rental home
- Fully executed lease agreement and proof of receipt and deposit (into bank) of security deposit
- 2 months’ worth of monthly mortgage payments for BOTH homes as a “cushion”
- 2 year history of managing investment property as a landlord. NOTE: Sometimes this can be reduced to 1 year with positive and documented compensating factors, such as a larger down-payment, perfect credit, longer than average employment history, etc.
Q: What if the LTV is more than 70%?
- Must qualify with both monthly mortgage payments
- 6 months’ worth of monthly mortgage payments for BOTH homes as a “cushion”
Q: How is the LTV determined?
- At a minimum, an exterior-only appraisal dated no more than 60 days from the date of closing.
