Qualifying for a Mortgage When You Already Own a Home

Ask Kim

Qualifying for a Mortgage When You Already Own a Home

Having renters for a house you can't sell might not help you qualify for a new loan.

My wife and I moved from Florida a few months ago. We were unable to sell our house there -- and we owe more on the mortgage than the house is worth -- but we have a renter. Is it possible to get a mortgage on a new house up here? Does it help if we have a signed lease from our tenants?

You could qualify for another mortgage if your regular income is high enough. Unfortunately, having a signed lease from your tenants doesn’t help if you are underwater on your mortgage. “Unless the borrower has 30% equity in the rental residence, the rental income they receive cannot be used when qualifying for a new loan,” says Chris Bennett, a mortgage consultant in Huntersville, N.C. Federal Housing Administration loans are a little more lenient. FHA requires at least 25% equity in your previous home to be able to count rental income. But even if you met the equity requirements, to account for possible vacancies you are generally allowed to count only 75% of monthly rental income, says Bob Walters, of QuickenLoans.

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The underwriting guidelines are strict for this type of scenario, says Bennett. Your total debt-to-income ratio generally must be lower than 45% and sometimes even less, which means that your mortgage payments (on both homes), credit card payments, car loan payments and other debt payments must be lower than 45% of your gross monthly income.

You will also have to meet a cash reserve requirement of six months’ worth of mortgage payments for both houses, says Bennett. However, portions of retirement accounts can count toward this reserve requirement.

Got a question? Ask Kim at askkim@kiplinger.com.