Buying a Second Home? Not So Fast

NEW YORK (MainStreet) — For the homeowner thinking of buying a second home for future vacations or retirement, conditions couldn’t look better. Unfortunately, tougher, post-crisis lending rules can prevent using future rental income from the property to qualify for a loan to buy it.

That can also torpedo plans to relocate for a new job by purchasing a new home and keeping the old one as an investment or until it’s easier to sell.

Today’s low home prices and low mortgage rates would seem to bring a second home within reach for many homeowners, as well as renters who want a property for use some time in the future.

A homeowner, for example, could pick up a second property now and rent it out when not using it for vacations, or rent it out full-time while planning to move in later. In a perfect world, you’d buy the property at a fire-sale price today, then sell your first home after prices have rebounded in a few years.

It sounds like a slick maneuver, but there’s a problem, says Jack M. Guttentag, professor of finance at the Wharton School of the University of Pennsylvania.

“Under the rules established by Fannie Mae and Freddie Mac after the financial crisis, rental income can be included in qualifying income only as documented in the owner’s tax return for at least one year,” he writes on his website, The Mortgage Professor. “That means that rental income cannot help you qualify for the mortgage used to purchase the house that will generate the income.”

This also undermines plans for homeowners who want to move to a new home and keep the former one as a rental, Guttentag says. You might want to keep the former home as an investment, or sell it later when prices are higher.