Renting my current home and building a new home?

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We are planning to rent our town home (would take a large loss if sold) so we can build on land that we owe free and clear (no debt on 80 acres). We plan to use a property management company to manage the rental. The question is will it be hard to qualify for a construction loan/mortgage? Or will the bank take into consideration the townhouse is being rented out and include some of that income when doing the debt to income ratio? Also will having a property management company run the rental increase are chances of getting a loan. Both my husband and i have credit scores over 700. Thanks for any advice.
Our current mortgage is the only debt we have, we have no consumer debt.
In response to taking a loss over an extended period: we wouldn’t take a loss because the rental income would cover the mortgage. Repairs would be minimum and in ten years if we wanted to sell “who knows the market might be recovered”.

  1. Reply
    May 4, 2011 at 12:37 am

    Yes it is going to difficult. They need to see how you will pay your bills if the rental is empty or tenant fails to make payments.

  2. Reply
    Ghost of Zeuz
    May 4, 2011 at 1:18 am

    “would take a large loss if sold” – You’re going to take the same loss, just spread out longer.

    To qualify for a construction loan, your debt to income ratio is gonna be in real bad shape. Typically, for residential properties the rental income is considered at 75% of actual (to allow for 3 months of vacancies per year. In the current market, they’re using 50%)

  3. Reply
    Caveat Emptor
    May 4, 2011 at 2:14 am

    You will have to qualify for the construction loan just like you would for a new mortgage loan. I suspect the lender will want to see documented proof of the ACTUAL rental income from the town home. It will not consider anticipated “projected future rental income” that does not yet exist in qualifying you. Use of a property manager should not be a significant factor.

  4. Reply
    May 4, 2011 at 2:29 am

    The most important things is getting your construction/mortgage loan approved would be your credit scores as well as your ratios. With these two items within the lenders guidelines, you should not have a problem.

    Make sure on your mortgage application that you indicate your newly build place will be your place of residence, not a second home, and that your old home is now an investment property. This information would have an effect on your interest rate.

    It would be better if you have a lease or rental agreement to support that fact that this is not currently dead weight that you are having to pay each month. A property management company might be considered a plus, but then that is an expense that must be paid also, even though this expense would not appear on your credit report.

    If the property is rented most lenders will consider approximately 75% of the rental amount as income. Some lenders have taken the stance that a newly rented place (within one year) any rental income would not be considered at all.

    I hope this has been of some benefit to you, good luck.

    “FIGHT ON”

  5. Reply
    Mom of three
    May 4, 2011 at 3:19 am

    I thin you should think things over again. Moving would just be silly and it would be too far away. We would miss you! ­čÖé

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