|How to show more income when purchasing a home
Buying can be considered simplistic. In a broad sense, income is used to offset a mortgage payment (a liability). One of the biggest obstacles home buyers will continually face despite market swings is showing enough income to offset other payment obligations (consumer debts) as well as a proposed housing payment.
When these numbers don’t add up to bank requirements, things get dicey. Here’s one exception that allows you to show more income and could seal the deal.
Two equity requirements
When we’re talking about equity we’re talking about cash in the form of a down payment to buy a home or equity in an existing residence defined as the difference between any loan amount owed on the property against the value.
• 20 percent down on purchase: If you are purchasing a home, you’ll need to put down 20 percent for this loophole. Twenty percent of the purchase price is the magic down payment figure needed in order to have the ability to use projected fair market rents to offset the mortgage payment. For example, let’s say your mortgage payment on your new property is going to be $2,400 per month. Fair market projected rents are $2,200 per month. Lenders will use a 25 percent vacancy computation to hedge against default. Using the 75 percent vacancy factor, you’ll get the additional benefit of $1,650 per month more income, so in other words, your income only has to offset a liability of $750 per month versus $2,400 per month. A $750 per month differential is equivalent to as much as $175,000 in purchasing power.
• 30 percent equity on existing primary home: Don’t have enough income to purchase the new home and debt service the other? If you have 30 percent equity in your primary home and you plan to keep the home as rental, same rule applies, lender will use up to 75 percent of projected fair market rents to offset the loan payment.
Much like the acquisition of a new investment property, the reversal works similarly when converting a primary home to an investment property. Assuming your mortgage payment on your current home is $1,700 per month, for example (including taxes, insurance, PMI if applicable and HOA), assuming the mortgage payment on the new property is $3,000 per month. Projected fair market rents indicate a gross rent of $1,600 per month, using the 75 percent vacancy factor $1,200 per month helps offset the liability, meaning now you have a $3,500 per month liability to account for rather than $4,700 (carrying both homes) as you are effectively leveraging buying power by the use of fair market rents.
Rates and fees more pricey
Taking out a mortgage to purchase an income property costs more. Lenders price income property loans higher than they do if the property is a primary residence. Rightfully so, in a foreclosure situation, most banks would give credence to which property is a consumer more likely to fight for? The roof over their head or a property they don’t live in? As such, expect income property loan to be approximately .25 percent higher in rate than a primary home.
As a consumer, you agree to pay the additional risk brought on by paying a higher interest rate and higher low-level pricing adjustments, which are tiny incremental pricing adjustments due to things such as occupancy, loan-to-value and credit score. Most lenders will allow using projected fair market rents to qualify.
What you’ll need
If purchasing an income property, expect the transaction to bear a higher appraisal fee. Traditional lending appraisal is typically around $400-$500. However, it is not unreasonable to expect upwards of $650-$700 for an income property appraisal (same goes for an additional unit on the home).
• Loan Tip 1: When buying the new house for investment purposes, the house need not be rented for approval. If converting a primary home to an investment property, expect more hoops to jump through in providing concise documentation and an extra home appraisal fee as well as an executed lease agreement along with evidence of the security deposit being deposited into your bank account. Yep, lender will request all this paper work.
• Loan Tip 2: Most lenders have called an AVM (automated valuation model), a proprietary from lender to lender. It is a valuation algorithm that takes into consideration closed sales around the subject property, and this is something that can be used in lieu of paying for an appraisal when converting a primary home to an investment property.
Scott Sheldon is a local mortgage lender, with over six years of experience helping people purchase and refinance primary residences, second homes and investment properties. Visit him at www.sonomacountymortgages.com.