Question for the lending pros (calling SGIP)

[daedalus]

I have a question on how a current mortgage balance and home equity affect your rates and ability to qualify for a new mortgage.

My fiancee and I both own a tiny home in a "fringe" neighborhood.  We bought in '03 and being slightly optimistic I might say it's worth about what we paid for it ($290k).  Balance owed is $140k.  (No, we're not anywhere near Irvine, but I enjoy lurking here and on the old IHIB, heh.)  We have no other debt and we plan to keep it that way. 

We are looking to move up to a nicer neighborhood within the next couple of years while keeping the current home as a Plan B.  We're looking at the pros and cons of just paying off the current home.  The question is, if we don't pay it off, how this outstanding debt would affect the terms of the new loan.  Would it impact the interest rate and/or amount we could qualify for?  Would paying off the current mortgage be a plus in the eyes of a lender?  Or does it not matter since our net assets would be the same?  This would of course reduce our liquid assets by the outstanding amount, but I'm assuming we would still put 20% down on the next house.

Thanks in advance!

 

[usctrojancpa]

I have a question on how a current mortgage balance and home equity affect your rates and ability to qualify for a new mortgage.

My fiancee and I both own a tiny home in a "fringe" neighborhood.  We bought in '03 and being slightly optimistic I might say it's worth about what we paid for it ($290k).  Balance owed is $140k.  (No, we're not anywhere near Irvine, but I enjoy lurking here and on the old IHIB, heh.)  We have no other debt and we plan to keep it that way. 

We are looking to move up to a nicer neighborhood within the next couple of years while keeping the current home as a Plan B.  We're looking at the pros and cons of just paying off the current home.  The question is, if we don't pay it off, how this outstanding debt would affect the terms of the new loan.  Would it impact the interest rate and/or amount we could qualify for?  Would paying off the current mortgage be a plus in the eyes of a lender?  Or does it not matter since our net assets would be the same?  This would of course reduce our liquid assets by the outstanding amount, but I'm assuming we would still put 20% down on the next house.

Thanks in advance!

One of my buyers is going through exactly the same situation.  As long as you are more than 30% equity in your existing home, you shouldn't have much of a problem qualifying for a loan on a new property.  Lenders will take 75% of your rental amount (you may need a lease in place) less your mortgage payment, property taxes, insurance, and HOA (if any).  The resulting monthly amount (either a positive or negative) will be added to your monthly income in determining your Debt to income percentage.  I would say that you would not have to pay off or down your current mortgage to qualify for a new loan.  Have you determined what you could rent your current property and would that cover your monthly obligations on it?  Or have you considered selling the property to release the equity that you have in it?

 

[sgip]

Thanks for the shout out.

Equity in your departure residence is not considered an asset. There is zero tangible benefit to having equity other than if you plan on renting the property and use that net rent to help you qualify for a replacement home. There are three important things to consider:

1) Talk with a mortgage professional. You might be able to qualify for the new house payment AND your departure residence payment without getting a rental agreement (etc).

2) The (etc)... 30% equity is the starting point to using departure property rent, however not only do you need a bona-fide rental agreement, a rental survey done by an appraiser ($150) but also a deposited check into your account by the prospective tenant. Yes, you have to get the tenant to write you a deposit check that must be cashed and verified. Not impossible, but quite difficult to do IMHO.

3) Paying off the house might change your situation slightly. You've still got taxes, insurance - if any, and HOA dues. to overcome with your debt to income ratios. If you have the ability to pay off that note, I'd suggest putting that cash into your purchase property to reduce the note your going to be paying on for a greater period of time. 

Another consideration: if you do not plan to sell your departure residence, and if your rate is above 5.5% you might want to consider refinancing it now while it's owner occupied, then put a Home Equity Line of Credit on it to the maximum allowed. You may never, ever use the line of credit but the worst time to borrow funds is when you need it quickly. A pre-existing line of credit, with start up costs around $300 is very cheap insurance against possible cash crunch issues.

My .02c

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[daedalus]

Thanks for both replies.  We don't have any firm plans for the departure house.  It's not something we're banking on (e.g. rental income) to help us lower the DTI, thus our thoughts of paying it off.  We're stronger savers than we are earners.