As I have watched my home depreciate in value by $200,000 since I occupied it in July 2005, I have also watched the price of new homes go down. We decided to go searching for a foreclosure or short sale to have a bigger house and rent the current house at since we have negative equity in the home right now. After finding our dream home to hold our expanding family, we were stopped dead in our tracks by the new approval process.
If you want to rent out your current home in order to purchase a new home, you have to have 30% equity in the home in order for the money received from rent to be counted towards income in the new approval process. Even FHA has tightened their requirements to needing not only 25% equity in your current home but a documented life change (such as a job transfer) to make the move necessary. If those requirements are met, 75% of the house you will be rented can be counted as income.
When I inquired why only 75% was covered, it was explained to me because it is theorized that out of a year, you will only have rent income for ten months. Even if you have a document in hand for a one or even two year lease, still only 75% of that total will be counted. But it was not the counting 75% that stopped me from being able to acquire my new home. It is the new guidelines that I have to have equity in the home I want to rent out that stopped me. This is because I would have to be approved to cover 100% of the mortgage for the current home I’m in as well as the new house. Again, even if you have a signed contract in hand, banks can not count that towards qualifying you.
This is a real shame. For many people this might be the only time they can upgrade their homes. This also would help the market because not only will one house be being rented (therefore not vacant), but another home would be purchased to have one less house vacant in another community. Some might wonder why the change because this new requirement was only signed into law four months ago! It is because people promised to rent their first houses, moved onto their bigger house, and for whatever reason defaulted on the mortgage on their first house. Many people either could not rent their house out or just figured since they had their bigger house, they did not need to make payments on the first one. After all, they would be in that house for a long time so why worry if a foreclosure went on their credit?
The whole housing crisis happened because people bought homes they could not afford. Then people were scared to buy. Now that banks have decreased rates to an astonished 4.5% or even lower if you go with an ARM, people still can not get approved. I could not refinance my home because after it depreciated, I did not have 20% equity invested. My house lost money because other people failed to make their mortgage. Though I had 20% down when I purchased the home, I watched that go to negative equity from no fault of my own. Refinancing is not an option nor is selling my home since I now owe more than what it is worth, and now I find out I can’t even rent it out and have it count as income! It’s almost like banks have decreased their rates to tease the American public because with so strict of guidelines, I do not see how anybody can get approved for any type of loan these days!
What is disconcerting is after searching over the Internet to find anything about the new guidelines, I found none. Realtors do not know the new guidelines and even the lending banks themselves had to look around to find the guidelines. You would think with the credit crunch becoming more bleak that some information would be available for the public to read before wasting days searching for a new home only to be told it was a wasted effort. I hope that this article helps save someone else (and some realtors) some time and not get their hopes up.