Many people try to grow their wealth by buying and holding real estate as an investment. It’s not a liquid asset, and unless you’re flipping something, it’s usually a long-term investment. That said, if you’re thinking of renting out your current home and looking to buy something else, I’d like to touch on the timeline of events in order to make that happen and I’ve pulled in my favorite lender, Brian Picker with Southern Trust, to help give some guidance from the loan qualifying side:
Brian says,
There are some differences between Conventional, FHA, and VA requirements so I’ll try to keep it simple.
If someone qualifies carrying the old house and new house they just need 6 months of PITI payments for current and new house payments, pretty straightforward.
If they need to use rental income from the house they used to live in to qualify for the new house they are purchasing there are some requirements that need to be met and we can only use 75% of the lease amount to offset the existing mortgage payment.
Conventional –
- Requires 30% equity in current house and need appraisal to verify position
- Need 2 months of reserves for departure house
- Need signed lease from new tenant and cancelled deposit check from new tenant
FHA –
- Requires 25% equity in current house and need appraisal to verify equity position
- No reserve requirements
- Need signed lease from new tenant and cancelled deposit check from new tenant
VA –
- They don’t have any specific written guidance on this for equity requirements on the existing house so we don’t need an appraisal done on the house they are converting in to a rental.
- Need 3 months reserves for house they are departing
- Need signed lease from new tenant and cancelled deposit check from new tenant
From the other side…
Once you have the required reserves in the bank, in addition to your down payment, you can begin to devise a plan on how and when to start looking for a new home:
1. Advertise your home for rent but build in some wiggle room. For example, if it’s March and you want 3 months to look for a new home, advertise your current place as available beginning in June. You can sign a lease and have that available for the lender.
2. Move out and rent a place for yourself while renting out your old one (neither the most efficient or financially effective method)
3. Look for a new home, go under contract on it, and then begin advertising your current home for rent (this is the best option if you don’t need the rental income to qualify).
I can help you find a tenant for your current home if you need/want help, or there’s always good ol’ fashioned Craigslist. Whatever you need, I’m here!