Many people make the decision to move out of their existing house and rent it out while purchasing another home with a mortgage. While this is possible, it is not always easy to do because of the difficult requirements set forth by the mortgage industry. You have to be able to prove that you can handle both payments before the lender will consider it.
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Before you can qualify for a mortgage on a second home and rent out your primary home, you will have to show your lender that you can meet the financial requirements. Every lender will have specific financial requirements, but they will all want to make sure that you can handle both payments. They may allow you to count a percentage of the rental income that you will generate from your home toward your total income. You will have to have enough money in savings to make both mortgage payments for a few months in many cases.
Besides having plenty of money to make both mortgage payments, you will also have to show that you are creditworthy. The lender will have its own credit score requirements when it comes to approving people for a second loan. Generally, you have to have a credit score in the high 700s or better to get qualified. If you have a low credit score, the lender will question whether they should do business with you.
When you are getting this type of loan, the lender will generally require you to come up with a large down payment. While you might be able to get away with a lower down payment for your primary residence, when you get into second homes, the requirement is generally a little bit higher. You might have to come up with as much as 20 per cent down on the mortgage before you can qualify. The lender wants to know that you are fully invested in this second property before they will work with you.
If you decide to turn your house into a rental property, you also have to think about other things besides the financing. You will have to figure out a way to find and keep tenants for your property. You will also need to change your homeowner's insurance policy over to a landlord policy. You also need to consider the impact that this will have on your taxes. If you live in the house for two out of the last five years and then decide to sell, you can avoid capital gains taxes on the property.
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