Converting Your Home Into a Rental Property

I currently own a home but want convert it to a rental property and purchase a new home …what do I need to know?

The housing market and home values are certainly not what they used to be.  Many homeowners are finding themselves with a loan balance similar to or more than the current value.  What if you want to purchase another home and can’t afford to take a loss?  Renting your current home is a popular solution but there are factors to consider.

CONVENTIONAL

With a Conventional mortgage, you will need at least 30% equity in your existing property to factor in the rental income. In addition, you will need to document either two or six months existing and proposed payments set aside for reserves.  For example, if the home is worth $100,000 and you owe $80,000 (20% equity), both the existing and proposed payments are included in qualification calculations and you must document six months payment reserves.  If you owe $70,000 or less, you can count the rental income towards your current mortgage payment and only need to document 2 months reserves. 

FHA

Another alternative is FHA since it doesn’t have the reserve requirement.    The simplest route is get qualified for your new home with both the mortgage payment for your existing home and the new home’s proposed payment.   If you need the rental income to qualify, FHA has two conditions where the 75% of the rental payments can be factored into your qualification.  If  you are relocating to an area "not within reasonable commuting distance" or you are purchasing in the same city as your existing property and have "sufficient equity" in the current home (25% or more), the rental income can be used to offset your existing property’s mortgage payment.  

For both financing options, a fully executed lease agreement and proof the security deposit has been received is required.  Also, an appraisal or automated value opinion to prove the amount of equity in the home may be needed.

It is also advisable to discuss your plans with your tax professional.

Are you interested in how to take advantage of this market but not sure how your current home factors in?  Contact me – I enjoy helping clients find solutions that get them what they want.