If you’re thinking about buying your next home, you may be asking yourself an important question:
Do I have to sell my current home before I can qualify for another mortgage?
Not necessarily.
A recent Fannie Mae guideline change may give some homeowners another option — keeping their current home, converting it into a rental property, and purchasing a new primary residence.
This can be especially appealing to homeowners who have a low interest rate on their existing mortgage, have built substantial equity, or simply don’t want to give up a property that could become a long-term investment.
What Changed?
Fannie Mae updated its guidelines for what it calls a departing residence — a home that has been your primary residence but will become an investment property when you purchase a new primary residence.
One of the biggest changes involves how potential rental income from your current home can be documented.
Previously, borrowers often needed to secure a tenant and provide a signed lease to establish the expected rental income.
Under the new departing-residence guidelines, a lease agreement cannot be used to establish the rental income.
Instead, the lender can establish the property’s market rent using acceptable documentation such as:
- An appraisal that includes market rents
- A Single-Family Comparable Rent Schedule (Form 1007)
- A market-rent analysis using sources such as MLS, Zillow or Redfin, with at least three comparable rental properties
This means a homeowner may be able to determine whether keeping their current home works financially without first finding a tenant and signing a lease.
How Much of the Rent Can Be Used?
Fannie Mae uses 75% of the supported monthly market rent when calculating qualifying rental income.
The remaining 25% accounts for expenses such as vacancy and maintenance.
Here’s a simple example.
Current Home
Monthly mortgage payment, taxes, insurance and applicable association dues (PITIA):
$2,400 per month
Supported market rent:
$3,200 per month
The qualifying calculation would be:
$3,200 × 75% = $2,400
In this example, the qualifying rental income could offset the existing home’s $2,400 monthly housing expense.
That could make a significant difference when qualifying for the mortgage on the next home.
What If the Rent Is Higher Than the Mortgage Payment?
Suppose the same property has:
$2,400 PITIA
but supported market rent is:
$3,600 per month
The calculation becomes:
$3,600 × 75% = $2,700
That produces $300 more than the existing $2,400 housing expense.
However, under the departing-residence guideline, that additional $300 generally cannot be added to the borrower’s qualifying income.
The rental income can offset the departing residence’s PITIA, but positive excess income isn’t used to increase qualifying income.
What If the Rent Doesn’t Cover the Entire Payment?
Let’s change the numbers again.
Existing PITIA:
$2,400
Supported market rent:
$2,800
Qualifying rent:
$2,800 × 75% = $2,100
That leaves:
$2,400 − $2,100 = $300
Instead of necessarily having the entire $2,400 housing payment work against the borrower, the $300 shortfall would be included when calculating the borrower’s debt-to-income ratio.
Depending on the rest of the borrower’s financial picture, that can make a meaningful difference.
There’s an Important Reserve Requirement
There is another part of the guideline homeowners need to understand.
If you’re using rental income from the departing residence to qualify and have less than 12 months of property-management experience, the lender must verify six months of reserves to cover the PITIA on the departing residence.
Those reserves are in addition to other reserves that may be required for the transaction.
For example, if the existing home’s PITIA is $2,400 per month:
$2,400 × 6 months = $14,400
The borrower would need to meet that reserve requirement in addition to the funds needed for the new home’s down payment, closing costs and any other applicable reserve requirements.
That’s why it’s important to run the numbers before deciding whether keeping the current home makes sense.
Why Would Someone Want to Keep Their Current Home?
There can be several reasons.
Maybe you purchased or refinanced when mortgage rates were lower and don’t want to give up your existing financing.
Perhaps you’ve built substantial equity in the property and would rather hold it as a long-term investment.
Or maybe your current home could generate enough rent to cover most or all of its monthly housing expense.
Whatever the reason, selling isn’t necessarily the only option when you’re ready for your next home.
Whatcom County Homeowners
For homeowners in Bellingham, Blaine, Ferndale, Lynden and other Whatcom County communities, this can be particularly worth evaluating before putting an existing home on the market.
If you’re considering moving to a larger home, relocating within Whatcom County, or purchasing your next home while retaining your existing property, we can estimate your current home’s potential market rent and determine how it could affect your mortgage qualification.
Snohomish County Homeowners
The same opportunity applies to homeowners throughout Snohomish County, including Everett, Marysville, Lake Stevens, Arlington, Snohomish and surrounding communities.
If you’ve built equity in your existing home and are considering moving up without selling it, we can look at the current payment, estimated market rent, available assets and your new-home budget to determine whether keeping the property could work.
Should You Sell or Keep Your Current Home?
There’s no single answer.
Keeping a home as a rental can be a great long-term strategy for some homeowners, but it isn’t right for everyone.
The first step is determining whether you can actually qualify for the next home while keeping the existing property.
Before listing your current home simply because you believe you have to sell it to qualify, it may be worth running both scenarios:
Option 1: Sell the current home and buy the next home
Option 2: Keep the current home as a rental and buy the next home
Once you know what each option looks like financially, you can make a much more informed decision.
Want to see which option could work better with your numbers?
Ready to Explore Your Next Move?
If you’re considering buying another home in Whatcom County or Snohomish County and would like to explore keeping your existing home as a rental, I can run the numbers with you.
We’ll look at your existing housing payment, potential market rent, available reserves and the estimated payment on your next home.
You may have more options than you think.
Jay Richardson
Loan Officer | NMLS #1962748
Edge Home Finance LLC | NMLS #891464
425-232-7107
jay@jayrichardson.com
Loan approval is subject to credit, income, asset, property and underwriting requirements. Rental income and reserve requirements vary by loan program and borrower circumstances. Guidelines are subject to change.
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