Qualifying for loan when you haven't sold or rented your existing home

C

Chuck_IHB

New member
I just thought I'd share my recent experience applying for a mortgage in case anyone else is in the same situation. We currently own a home in Irvine and have been looking at buying another home, so we went through the process of submitting our financial information to our loan guy at Bank of America. We plan to rent our existing house out since we have owned it forever and would like to keep it for income, but we do not yet have a tenant. It looks like the rules have changed a bit with regard to the way that they look at your existing mortgage debt - the conclusions I have drawn from this process are as follows:



If you own a home or condo and you have not sold it or rented it then the debt that you hold on this property is counted in the debt to income (DTI) ratio that they use for approval. They no longer assume that if your expected rent is equal to or less than your mortgage obligations you are ok - if you do not have a signed lease and a security deposit in hand then they will not count the potential rental income in this calculation. You also need to have at least 30% equity in the house based on a current appraisal. Likewise if you are planning on selling the home they won't believe this unless you have a sales contract in hand.



The DTI ratio that they seem to be using for the loan we were looking at (a $625,000 "jumbo conforming" loan) is 45%. So, the maximum debt (mortgage+property taxes+dues) that you can have, including the house that you may plan to rent or sell, is 45% of your earned income.



It looks like we'll be ok, but I found it interesting that it seems that you need to qualify for 2 loans instead of one these days if you are not a first time home buyer or someone who has sold their home and is now renting!



If any of the mortgage types out there think this is odd or not a standard practice for the industry please let me know!
 
[quote author="garrison" date=1251433971]Wow, lenders are still allowing for a 45% DTI? I assumed we were back to 36'ish%. I'm also assuming this is the back-end ratio?



To those in the know: is a front-end ratio still considered a valid limiter if you have zero debt, or is it disregarded in that type of scenario? Using me for example: I have zero debt (we pay off credit cards every month, own both of our cars outright, etc...), 800+ credit scores and a relatively high income stream. Will a lender limit me by the 28% front-end rule, or will they allow me to go to (or above) the 36% back-end ratio?</blockquote>


I'm afraid you lost me on both the front end and the back end(!!), so maybe you could explain? I do know that all of your debt is factored in to this 45% ratio (we don't have any debt other than our mortgage). Thanks!
 
[quote author="Minimorty" date=1251434706]Do lenders take into consideration open (but unused) lines of credit in the calculation of the back end DTI?</blockquote>


Interesting question! I can't say for sure since we don't have any open but unused lines, but I could see a bank wanting you to close out the line (if it is a HELOC) and open a new one with them....
 
I believe the front end includes property tax, PMI, HOAs, etc.



From Wiki (not that Wiki is always right, just wanted to confirm my understanding):



Two main kinds of DTI



The two main kinds of DTI are expressed as a pair using the notation x/y (for example, 28/36).

The first DTI, known as the front ratio, indicates the percentage of income that goes toward housing costs, which for renters is the rent amount and for homeowners is PITI (PITI includes mortgage principal and interest, mortgage insurance premium [when applicable], hazard insurance premium, property taxes, and homeowners' association dues [when applicable]).



The second DTI, known as the back ratio, indicates the percentage of income that goes toward paying all recurring debt payments, including those covered by the first DTI, and other debts such as credit card payments, car loan payments, student loan payments, child support payments, alimony payments, and legal judgments.[1]
 
[quote author="Minimorty" date=1251434706]Do lenders take into consideration open (but unused) lines of credit in the calculation of the back end DTI?</blockquote>


short answer: No.



I believe they may take into account the current balance on your CC's at the time they pull the report. But no, they do not take into account the full lines available to you. In fact your FICO score is determined partially by what portion of your credit lines you use. So, having a lot of available credit is a good thing (for that aspect of the qualification, which is of course separate from the means test or DTI).



Now, once you get the house, you should expect your CC companies to decrease your limits... but that's another story.
 
[quote author="cara" date=1251515730][quote author="Minimorty" date=1251434706]Do lenders take into consideration open (but unused) lines of credit in the calculation of the back end DTI?</blockquote>


short answer: No.



I believe they may take into account the current balance on your CC's at the time they pull the report. But no, they do not take into account the full lines available to you. In fact your FICO score is determined partially by what portion of your credit lines you use. So, having a lot of available credit is a good thing (for that aspect of the qualification, which is of course separate from the means test or DTI).



Now, once you get the house, you should expect your CC companies to decrease your limits... but that's another story.</blockquote>




Interesting. I would have thought that it would be considered to some degree. A person with 100k in unused open credit (lets say credit cards) would be able to leverage himself much higher than the 36% DTI than a person with only 10k in unused open credit. Seems like more of a potential risk to the lender to lend to the first person.
 
[quote author="Minimorty" date=1251516127][quote author="cara" date=1251515730][quote author="Minimorty" date=1251434706]Do lenders take into consideration open (but unused) lines of credit in the calculation of the back end DTI?</blockquote>


short answer: No.



I believe they may take into account the current balance on your CC's at the time they pull the report. But no, they do not take into account the full lines available to you. In fact your FICO score is determined partially by what portion of your credit lines you use. So, having a lot of available credit is a good thing (for that aspect of the qualification, which is of course separate from the means test or DTI).



Now, once you get the house, you should expect your CC companies to decrease your limits... but that's another story.</blockquote>




Interesting. I would have thought that it would be considered to some degree. A person with 100k in unused open credit (lets say credit cards) would be able to leverage himself much higher than the 36% DTI than a person with only 10k in unused open credit. <strong>Seems like more of a potential risk to the lender to lend to the first person.</strong></blockquote>


Banks dont use common sense.
 
My company has a 52% debt to income ceiling. You can close with that high of a DTI as long as the deal makes sense - like for like payment, good cash reserves, etc. Out of 100 submissions 1-2 might pass that test.



Unused lines of credit are not counted in DTI calculations.



When my borrowers contact me with identical circumstances as the thread originator, I tell them this:



1) Rent your departure residence now.

2) Move into the neighborhood you want to live in.

3) Purchase in 6 months after you've established a rental history. We don't take into account the departure residence LTV because of the existing track record of home rental income.



"But what about rates?" Rates aren't changing. That isn't an issue.



The nice things about this scenarios are A) you can qualify to buy. B) you get a heads up about the neighborhood. Just because you want to live in an area it does not mean you will like living there. C) you can enroll your kids in the schools, D) if things don't work out you can move back, and E) sometimes you can find out about homes that are not yet listed or neighbors who want to sell w/o an agent.



My .02c



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