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Last year I took out a loan for a house that I wound up renting out. The loan is for $260k. My current income average over the past three years is over $100,000, and I just signed a contract at a new employer for $110k a year (I'll be under 1099 contract with them until January when I'll then be hired onto the company).

I'd like to explore getting a loan for a house to live in. Given that I have a loan out for $260k already, I'm unsure if I would even be eligible for a loan.

My rental property cost is $1,700 including taxes, my renter pays $2300. My credit score is 752 on CreditWise/Chase. I have 25k in student loans that I'm paying off. Credit cards are all paid off.

Question

I don't want to out-right apply for a loan and have another hard pull on my credit if there's no chance of getting a loan. So, given my current situation, would I even be eligible for a loan for a new property?

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    Does your current lender know that it is not owner-occupied?
    – Jon Custer
    Oct 20, 2022 at 18:00
  • @JonCuster They do not, is that a requirement from most lenders?
    – dblue
    Oct 20, 2022 at 18:48
  • @dblue that may in fact be part of your mortgage agreement. If you didn't explicitly ask for an investment loan then it is very likely that your note included a provision where you promised to occupy the property after the purchase.
    – littleadv
    Oct 20, 2022 at 18:51
  • Typically you just have to declare intent to occupy, so if you wound up renting it out due to a change in circumstances that's not an issue, the issue is when you commit fraud by taking out a loan intended for primary residence with the intent of not living there. I don't believe that is relevant to getting a new loan.
    – Hart CO
    Oct 20, 2022 at 18:57
  • @dblue - one thing to be aware of is that second homes are generally treated differently than first owner-occupied houses. This includes needing 25% down and a ~2% higher mortgage rate. Source: having recently bought a second house and going through all the questions from the mortgage company on who will live there and will it be rented and...
    – Jon Custer
    Oct 20, 2022 at 19:30

3 Answers 3

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The main hurdle to clear will be your back-end DTI which will typically need to be below 45% to qualify. That means if your gross income is $8,333/month you need your monthly debt to be under $3,750. Subtract from that your current monthly mortgage payment and your student loan payment amount and what's left is about the max monthly mortgage payment you can qualify for.

The rental income will likely not be factored in at all since it is new, and even after they do consider it they consider only a portion of it (~75-80% of rental income seems common after 2+ years of renting). This part may vary, but don't be surprised if they count the rental debt but not the rental income.

Easiest thing to do is just get in contact with a lender and have them run some scenarios for you, you can get a lot of information before formally applying.

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  • Thank you for your response. This really helps. I'll select an answer within the next few days.
    – dblue
    Oct 20, 2022 at 22:34
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Your existing loan will not be counted as just a disembodied liability, as if it were credit card debt. Rather, it will be in the context of (1) the rental property as an additional asset and (2) the rent received from the tenant as additional income. The latter will likely be discounted a bit for potential vacancies, etc.

So your solvency in taking on a new mortgage will be evaluated in the overall picture -- the value and equity of both houses and your income from both employment and leasing.

Given that you have (presumably) positive equity and cash flow in the existing house, you should be in as strong a position as if you didn't have that house or mortgage at all and were simply trying to buy the new house on only your job income.

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  • Thank you for your response. This really helps. I'll select an answer within the next few days.
    – dblue
    Oct 20, 2022 at 22:34
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You can talk to mortgage bankers/brokers before applying, they'll be able to provide you a ballpark estimate just based on the information you've provided here. After that you can "officially" apply, they'll pull your credit and ask for documentation to confirm the information and will move forward.

To me the more risky part is that you're now a 1099 contractor with some unclear promise of future employment. Not sure how strong your employment history is, but generally self-employment makes mortgage bankers a bit more cautious than regular long term employment contracts.

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  • Thank you for your response. This really helps, I'll select an answer within the next few days.
    – dblue
    Oct 20, 2022 at 22:33

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