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Renting Existing Home and Buying New House
I own a house but want to sell my existing home and rent it out and buy a larger home. How much time must pass from Chapter 7 Bankruptcy discharge to be eligible for a second home loan? How would using house #1 as a rental affect DTI? Do we need to find the tenant first?
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Obtaining a Second Home Loan after a Chapter 7 Bankruptcy Discharge
The waiting period to be eligible for a second home loan after a Chapter 7 Bankruptcy discharge depends on the type of loan you’re applying for. Government-backed and conventional mortgage loans require a mandatory waiting period after Chapter 7 Bankruptcy. Non-QM loans are alternative lending options with no waiting period after Bankruptcy. However, borrowers need a 10% to 30% down payment on non-QM loans.
FHA Loan:
- HUD, the parent of FHA, requires a 2-year waiting period from the date of discharge.
- Re-established credit and no late payments or derogatory credit tradelines after discharge.
VA Loan:
- It often takes two years after discharge.
- Re-established credit and no late payments or derogatory credit tradelines after discharge.
- If the borrower had extenuating circumstances that led to filing bankrupty, that would be considered under manual underwriting.
Conventional Loan:
- There is a waiting period of around four years after Chapter 7 discharge.
- Re-established credit and no late payments or derogatory credit tradelines after discharge.
USDA Loan:
- The waiting period is about three years after the discharge.
- Re-established credit and no late payments or derogatory credit tradelines after discharge.
Effect of Converting House #1 into a Rental Property on DTI Ratio: Converting your first house into an investment property may positively change your DTI ratio. This will be based on the following scenario:
Rental Income Consideration:
- Most lenders will allow you to use up to 75% of the mortgage of House #1.
- Instead, use its rental income to help reduce your DTI.
Lender’s expectations and requirements regarding rental income
Documentation Required:
- Rental income is included as income.
- Thus increasing the borrower’s DTIs.
- To do this, lenders usually combine a DTI assessment with an appropriate appraisal—a signed lease agreement.
- Such proof could be received as certificates for the security deposit and the first month’s rent.
History of rental deductions on income taxes (if present): Is It Necessary to Locate a Tenant First?
Finding a Tenant First is Ideal:
- The tenant must be in place for the rental income to manifest in your DTI calculation.
- Lenders will need a lease submitted with all the signatures from the parties supposed to sign and rental payments.
Vacancy Consideration:
- Such assumptions are made.
- This is because if you do not locate a tenant in time, the lenders, for instance, may disallow you to factor in the expected income from the property into the DTI calculations.
- This would hinder your ability to qualify for another mortgage on a second property.
In other words, the time one has to wait to qualify for a second home loan after being released from Chapter 7 Bankruptcy is loan-type dependent. Renting out your first home will decrease your DTI ratio, assuming you have a tenant or tenant’s undertakings. Getting a tenant before applying for a second home loan is better to increase the chances of getting it.