October 10, 2012
In short – yes your clients can purchase a new home even if their existing home has no equity or is underwater. They can even do so with a 3.5% down FHA loan or $0 down VA loan!
I get so many questions or scenarios where a prospect would like to purchase a new home, but has been told “No” that they don’t qualify because of their existing home. This is simply not true. There are always options to make purchase loans work. Here are some examples of solutions.
First, we need to understand the obstacles that do exist when a borrower has no equity in their current home. The most common concerns for the new lender generally are:
- Income – Loan guidelines do not allow us to qualify a new purchase by using rent from a current home IF your client doesn’t have at least 25% equity in their current home. A borrower’s income must support both housing payments and any monthly payments for consumer loans, installments, etc.
- Occupancy – If your client is trying to purchase a smaller or laterally sized home as owner occupied, it has a much higher probability of failing. A new home larger than an existing or a home that is closer to work is a much easier leap in judgment for underwriters.
- Buy and Bail – A new lender does not like the idea of a borrower being opportunistic–buying one home at a lower price in order to abandon another that is over-leveraged.
Each of these concerns can stack up and work against a prospective homebuyer. The solutions for these problems can be as diverse as the situation.
Here are a couple of real strategies that I’ve customized for borrowers:
- Income – If income is not sufficient to cover all the payments, we might consider adding a co-borrower. Adding a co-borrower allows us to use their income and expenses, mixed with our borrower’s and qualify. Sometimes, using just one year’s taxes can create the solution needed. Also, the borrower could actually move out of the home with negative equity and rent it to someone else. While we couldn’t use the rent immediately, when the next year’s taxes are filed showing the rent, we could use it then. We could even combine any of these strategies. Here are some ACTUAL loans closed: Navy Seal, Two Teachers, and One Year’s Taxes.
- Occupancy / Buy and Bail – The solutions for these guideline concerns are more about the type of property that is being purchased, where it is located in relation to the other home, etc. Good advice from your loan officer (ME) will resolve much of this. It may even make sense to purchase an investment property, rather than owner occupied. An investor purchase even creates more income to use because we would be able to use rent from the investment property in order to help qualify. See more about investor loans.
Yes, there are obstacles. Yes, there are always solutions. If you or your prospect has negative equity, we should talk. I’ll define every solution that exists.
Call us today at 800-781-0899 or visit our website to find out how we can help your clients qualify, because at Qualified Home Loans, we help your clients qualify!
At Qualified Home Loans, we can help your clients with creative ways to find money for their down payment – and turn them from renters to homeowners today!
The equity position in rental properties has no effect on your client’s ability to purchase other properties. This applies to all purchases – rentals, owner occupied, etc. Below is an example of how we helped a client purchase a new rental property, even though they had no equity in their current home.
We received this borrower as a referral from their realtor after they had been told they could not buy without equity in their current home. It’s simply not true. There is nothing prohibiting someone from buying another property while they might be negative on their current home. These clients wanted to buy an investment property near their current home. Here is a previous posting on how to buy a home when your current home is underwater.
After reviewing their income we determined that we did not quite have enough income. However, with 25% down we were able to use the proposed rent from the new property in order to qualify. That income offset the new home payment.
It was a smooth, easy transaction and a great start to a new Realtor relationship.
Qualified Home Loans – we help your clients qualify.