Many people are opting to keep their current home as an Investment Property, when they buy a new primary residence – and become “first time landlords”.
For Borrowers with formal, documentable landlord experience, it is easier to demonstrate the cash flow on a particular property and how that rental income will offset the PITI owed on the investment property.
For Borrowers with no formal landlord experience, Fannie Mae and Freddie Mac have recently relaxed their requirements.
Currently, when a Borrower, who will be a first-time landlord, applies for conventional financing on a new primary residence, there is not a requirement to have had previous landlord experience. Additionally, there is not an established amount of equity required in the departing residence. The Borrower is able to use an established percentage of the projected rent, to offset the existing mortgage PITI payment on the departing residence. This lowers the overall debt ratio for the Borrower and translates into the Borrower being able to afford a higher priced primary residence!
Typically, the lender will ask for a copy of a lease agreement for the home that the borrower intends to rent to tenants, and a copy of the cancelled check for a rental deposit. In the absence of a fully-executed lease agreement, some lenders will allow the projected rental income to be established by a Rent Survey, provided by an appraiser. You will need to check with your lender to discuss their requirements.
For FHA financing on the new primary residence, the first-time landlord Borrower must still have 25% equity in the departing residence, to be able to offset that home’s PITI with an established percentage of the projected rental income. An appraisal on that home will be required to establish value, as well as the projected rental income. The bank making the loan may still require a fully executed lease agreement and cancelled check for a rental deposit, as proof of the established monthly rent. You will need to check with your lender to discuss their requirements.
