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I own a home now, and I currently live in one apartment and rent out the other. Looking to expand and purchase a second single family home to live in and rent out all of my current home. I have no mortgage on the first home. What would be my best option? Thanks!
asked Nov 8, 2018 in Buying a Home by anonymous
edited Nov 12, 2018 by GinaPogol

1 Answer

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As I understand it, you have a duplex (2-unit home) with no mortgage, you live in one unit as your primary residence and treat the other as a rental (investment) property. You'd like to convert your current home into a rental, buy another 2-4 unit building, living in one unit as your primary residence. And you want to know which mortgage is best for this endeavor.

There answer depends on a couple of factors:

1. How much do you have for a down payment?

FHA allows down payments as low as 3.5 percent for multi-unit homes, as long as you make one unit your primary residence. And FHA underwriting is just about the most flexible you'll find if your income is tight or you have credit issues. However, FHA mortgage insurance is expensive and can't be canceled as long as you have the loan.

If you're eligible for a VA home loan, you don't need a down payment for a primary residence, even if it has more than one unit.

Fannie Mae requires at least 15 percent down for a duplex and 25 percent down for a three or four unit property.

2. Would you need the income from your new property to qualify for your mortgage?

You should be able to use the income from the rental unit you already own to qualify (if necessary), as well as the projected income from the unit you'll be vacating. Note that lenders usually apply a "vacancy factor," reducing the qualifying income by 25 percent.

If you need the income from the new property to qualify for the mortgage, things get more complicated. It's good that you have landlord experience, because most programs require it if you want to use income from the subject property to qualify.

You'll be allowed to use 75 percent (usually) of the projected income (either as determined by a home appraiser or by existing leases from current tenants).  Depending on the program, lenders either add the income from the new property to your other income for qualifying purposes, or they use it to directly offset the payment of the new home.

However, if you use the income from the new property to qualify, you'll almost certainly have to prove that you have reserves. "Reserves" refers to money on deposit that you can use to pay the mortgage if you experience an interruption in income. Reserves are measured in months. So if you have $10,000 in the bank, and your property expense (principal, interest, taxes and insurance) come to $2,000 a month, you have five months of reserves ($10,000 / $2,000 = 5 months).

Many programs require at least six months of reserves if you rely on income from the subject property to qualify.

If you don't need the income from the new property to qualify for your mortgage, the process is easier and the appraisal is cheaper.

What if you don't have the reserves, or a big down payment, and don't want an FHA loan? There is the option of borrowing against your current home. You can get a home equity loan or line of credit, pop it in your bank account, and leave it there for a few months. Just make sure you disclose the loan payment when you apply for your new mortgage.

For a more complete guide, check out this article on buying and financing multi-unit property https://themortgagereports.com/27635/multifamily-homes-make-your-house-pay-for-itself

Good luck and thank you for writing.
answered Nov 12, 2018 by GinaPogol (47,650 points)
edited Nov 12, 2018 by GinaPogol

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