Buying a second home and renting the first: qualifying for the mortgage

Buying a second home and renting the first

Are you thinking about renting out your current home and buying a new one? The biggest thing to consider is how to qualify for a mortgage because you’ll be owning two properties at once.

And certainly, you want to make sure that the financials work for you, because you don’t want to get overextended. So here are some things to consider when buying a second home and renting the first.

Assess your financial situation

Take a close look at your finances to determine if you can afford to carry two mortgages. Consider factors like your current income, savings, and any potential rental income from your current property. Lenders will want to see that you have enough income to cover both mortgage payments comfortably.

Talk to a mortgage professional

Before you go out to buy a second property, you want to make sure that you will qualify for a mortgage. Lenders may consider a portion of the rental income from your current property when calculating your debt-to-income (DTI) ratio. However, they typically apply a vacancy factor and may require a history of rental income to include it in your application.

The portion of rental income that lenders can include in the DTI varies depending on the type of loan and the lender’s policies. Generally, lenders may consider 75% to 85% of the gross rental income from your property. This adjustment helps ensure that borrowers can still afford their mortgage payments even if the property experiences vacancies or rental income fluctuations.

It may be a good idea to use a mortgage broker rather than a bank because a broker has access to many different lenders. Certain lenders may give you more favorable rates and have more favorable down payment requirements than others, making it more possible to pursue this avenue of buying a second home while renting out the first.

Get pre-approved

Before you start house hunting, get pre-approved for a mortgage. A pre-approval letter shows sellers that you’re a qualified buyer. It also means that you’ve done the leg work to demonstrate to yourself that you’re likely to be able to finance the property. Having this level of evaluation is good for you and your financial future as well as to set you up for a mortgage approval later.

To find out the difference between pre-approval and pre-qualification, watch this video I made last year.

Consider all of the ramifications of being a landlord

For more information about all the other considerations when becoming a landlord, like legal and tax issues, preparing the property, marketing the property and more, check out this article I did last week, “Converting your primary residence into a rental property.”

Renting out your current home and buying a new one can be a complex process, but with careful planning and preparation, you can successfully qualify for a mortgage and achieve your homeownership goals. Remember to research your options, assess your finances, and work with professionals who can help you navigate the journey with confidence.

Reach out if you need help

See this page for my contact information to get my help if you would like my assistance figuring out the best mortgage strategy. I am at your service.