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Nadine Cius

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Nadine Cius's Blog

This Blog will answer questions regarding real estate and mortgage financing. One question will be selected from the most frequently asked questions of the week regarding real estate and mortgage financing.

Are there Any Guidelines for Converting Principal Residence into Investment Property?

March 11th, 2010

Are there any guidelines for converting my principal residence into a rental property?  Buyers looking to move up or who are unable to sell their property at a gain or who want to retain their property for future personal use often consider turning their current residence into rental property.   For loan qualification purposes, if there is a pending sale on your current principal residence, then both the current and the proposed mortgage payments must be used to qualify you for the new transaction.   Additionaly, most lenders will require at least 6 months pincipal, interest, taxes & insurance (PITI) reserves for both properties. The lender may waive the 6 months requirements and finance the property with 2 months PITI reserves if you have at least 30% equity in the current home.

If there is documented equity of at least 30% in the existing property, you may qualify using 75% of the rental icome to offset the mortgage payment.  The rental income must be documented with: a copy of the fully executed lease agreement; and  the receipt of a security deposit from the tenant and deposit into  your account.  If the 30 percent equity in the property cannot be documented, rental income may not be used to offset the mortgage payment.  Both the current and the proposed mortgage payments must be used to qualify for the new transaction and 6 months of PITI reserves for both properties are required.  Make sure to check with your lender for their specific guidelines.

Following are questions you should ask and things you should consider before turning your current home into a rental property:

1.  Income - Will you qualify with your present income for both properties.
2.  Reserves- Do you have the required reserves needed.
3.  Equity - Will you need the equity out of the current home for down payment on the new home.
4.  Property Management - Do you have the extra time, desire and knowledge required to be a landlord or will you obtain the services of a property managment company, which will impact your budget. 
5.  Taxes & Capital Gains - Are you aware of the tax and captial gains ramifications. Talk with your tax advisor about deductible expenses pertaining to the rental property and about captial gains taxes if you decide to sell after renting. Budget for the increase in property taxes since the property will no longer qualify for homestead exemption.
6. Hazard Insurance - You will need to convert your current policy into landlord rental property policy.  Lenders may require you to purchase rent loss insurance  for loss in rental income or rental value due to property damage by external hazard.

7. Rental Market - What is the rental market in your area.  Will the rental income cover your mortgage and related expenses. Get the numbers for renting and for selling so you can compare.

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