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.
Of course, the homeowner could move to a rental, rent out the current home for a year to satisfy the requirement, then buy a new place and move again, but this is probably too many steps (and expensive, with a year's worth of rent payments) for most people.
To make matters worse, anyone who buys a property for part-time or future use and declares rental income on the property would likely be classified as an investor, Guttentag says. The lender would probably demand a higher interest rate and a down payment of at least 20%, instead of the lower down payment required of some lucky, highly qualified borrowers using their loan for a primary residence.
Because Fannie and Freddie stand behind most mortgages sold today, their rules dominate the market. Guttentag argues that the government-owned firms are being overly conservative, and prolonging troubles in housing.
“A major reason the house-purchase market is in the doldrums is the virtual absence of move-up buyers,” he says. “In large part this has been due to the loss of equity associated with home price declines.”
For many homeowners this loss could be made up at least in part with rental income, he says, if it were not for the “misguided change in rules regarding rental income.”
If you are one of the many who can't get a mortgage on a new home, keep in mind that renting is not equal everywhere. Check out MainStreet's look at 10 Great Cities for Landlords!