So you have decided that the house you're in just doesn't work for you anymore. You could sell the house or let it become the beginnings of your real estate empire by renting it out and buying a new house. Before you get all excited about the new house, you need to consider several factors. Obtaining a mortgage for the new house may be more of a challenge than you think.
Home Owner Associations have the power to stop you from renting your old house. Check the rules, regs and covenants. Some HOAs don't prohibit renting outright but only allow a certain percentage of the homes to be rented at any one time. You may have to put your old abode on a waiting list. Talk with the other homeowners who are renting their houses to see how long it might take.
Most mortgage applications ask if you intend to occupy the home. Check to see what the restrictions are for the mortgage on the old house. If you're unclear, call the mortgage company and ask. As in all real property matters, and a home is considered real property, it's best to have the yes in writing. Keep in mind lying on a mortgage application could be considered fraud. If you said you were going to occupy the old home and it's been less than a year, you probably shouldn't rent it out just yet.
The key word in the question is "can." Just because you can do something doesn't mean you will be able to do it. You may want to rent the house but there may not be anyone interested in renting it at the price you need. Check newspapers, online sites, signage in your neighborhood and real estate agents that specialize in leasing to see what the probability is your house will be rented and what the going rates are before you start looking for a new house. You may not be able to afford a new mortgage if you can't rent out the old house.
Another factor to consider is if you're going to be an absentee landlord. If the house you want to buy is more than, say 50 miles away from the old house, you may spend quite a bit of time going back and forth. It's the landlord's responsibility to fix a broken toilet for example. Hiring a property management company solves that problem but it requires a fee of up to 15 percent of the rental fee.
Renting the old house and living in the new house means you're responsible for both.
New House, New Mortgage
If all the factors to renting your old home point to a yes, the new mortgage lender will review your loan application. They may not take into consideration the rental fees as income if you've rented the house less than one year. The lender will demand to see your tax returns to verify the income. They may also request to see a signed lease agreement for the future. What that means is the two mortgages may put you beyond the acceptable debt to income ratios of between 28 to 36 percent. Calculate all your minimum monthly credit card payments, personal loan payments, car loans and any other debt plus your old mortgage and your new mortgage. Divide that total by your monthly income. That will give you your debt-to-income ratio, which ideally will be between 28 to 36 percent. The other factors of credit scores, asset levels and steady employment will be factored in as well.
If your debt to income ratio is higher than 36 percent because you can't include the rental income, you could have to move out of your old house and lease a house yourself before you qualify for a mortgage. That means moving expenses, deposits and your own lease payments.
You hope that everything goes smoothly renting out the old house. And then life throws you a curve. You are now responsible for the repair and maintenance for two homes and two insurance policies. The repairs on the rental home can be deducted as a business expense but they're out-of-pocket expenses none the less. If the house stands vacant between renters you take a hit in your income. Also consider the possibility that the renter may stop paying rent and you'll have to pay the expenses of eviction and still have lost the income for the months he didn't pay.
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