The answer to your question depends on your personal and financial objectives. If your first priority is to buy a more valuable home in the near term then our recommendation is that you sell your home and apply the proceeds and your savings to the purchase of a new home.
Selling your current home and buying a new home now enables you to take advantage of the equity you have in your current property. Plus, it is usually easier to buy a new home when you sell your current home and you can use the money you receive from selling your home to increase your down payment or afford a higher priced property.
If you do not sell the property, then your current total monthly housing expense including your mortgage payment, property tax, home insurance premium and homeowners association (HOA) dues, if applicable, are included in your debt-to-income ratio when you apply for the mortgage on your new home. Although you may be able to use rental income from your current property to offset these expenses, you need to earn sufficient income to afford two mortgages instead of only one.
Use ourMORTGAGE QUALIFICATION CALCULATORto determine what size loan you can afford
Keeping your current home likely reduces the mortgage amount you qualify for on the new home you want to buy. In short, the lower your mortgage, the lower the price home you can buy. Plus, you are not able to use all of the equity in your current home toward the purchase price of the new property which also reduces how much home you can afford.
Another advantage of selling your current home and buying the new home now is that you can fix your mortgage terms. No one can predict how interest rates will change in the future but you may be able to lock-in a lower rate by buying a home today. If rates decrease in the future you can always refinance but if rates increase over the next several years, you are stuck paying the higher rate if you wait.
The table below shows mortgage rates and fees for leading lenders in your area. We recommend that you contact multiple lenders to determine the mortgage you qualify for and to compare loan terms. Shopping lenders is the best way to save money on your mortgage.
If your goal is to buy a nicer home today then selling your current home now makes the most sense but if your objective is to develop a portfolio of investment properties that generate rental income then you should consider keeping the property and waiting before you buy a new home.
You may also want to consider using a portion of your savings to pay down the mortgage balance on your current property. Additionally, if you are able to pay off the mortgage in full in the future, the property could generate meaningful cash flow which may enable you to qualify for a higher mortgage amount if you wait to buy a new home.
Please note that there are a couple of points to keep in mind about using rental property income to qualify for a mortgage. To include rental income in your mortgage application, you are typically required to provide your tax returns for the prior two years to confirm the income.
If you do not have a two year history of rental income, lenders may use the lower or 75% of: 1) rental income according to an investment property appraisal report; or, 2) the income according to a signed lease agreement. So the rental income figure that lenders use to qualify you may be lower than the income the property actually generates. Additionally, the lender may require that you have a two year track record as a landlord for the full amount of the rental income to be factored into your application.
If the property generates positive cash flow based on the lender’s rental income analysis, then this cash flow is added to your monthly gross income which helps you qualify for the new mortgage. If the property is cash flow negative, then the loss is included in your debt, which lowers the mortgage you qualify for.
For example, if you own a rental property that generates $500 in monthly losses then the lender adds $500 to your other personal debt expenses such as credit cards as well as car, personal and student loans. In this case, you must earn sufficient income to absorb the loss on the rental property and pay for the mortgage on your new home, which may be challenging.
One final option to consider is to use a home equity loan or line of credit (HELOC) to pay for the down payment on a new home. This approach enables you to use the equity in your current home to buy a new home without waiting.
Although using a home equity loan or HELOC enables you keep your current home and use it as a rental property, you receive less proceeds to apply toward the purchase of a new home. Additionally, taking out a home equity loan or HELOC means that you incur additional interest expense which reduces the mortgage you qualify for and what price home you can afford.
Despite these limitations, a home equity loan or HELOC may represent a middle ground option that enables you to accomplish both of your goals -- buying a new home while renting out your current one.
The table below show home equity loan terms. Contact multiple lenders to find the loan that best meets your needs.« Return to Q&A Home About the author