Buying a new house and keeping your current home?
You might ask: Why lenders ask SO MANY questions when you own a house and want to buy another? Your income qualify for both house payments – the house that you are buying and where you live now, why do underwriters ask so many questions about my current home???? You plan on renting out your current home, why do they think you are lying? Here is why.
As we all know, the housing market crashes so hard that many existing homes are upside down in value. For homeowners who just simply cannot afford the house payments, they walk away. They allow banks to foreclose on their house. They move back home living with their family or rent a house until their credit is repaired to buy again. However, many homeowners want to let go of their homes, but they don’t want to rent. They want to walk away not because they don’t have a job or they cannot afford the house payments. They walk away because they don’t think it makes financial sense to invest in a house that is no longer worth the value. Yet, it is so upside down in value that they are not able to sell it. Therefore, instead of just walking away from their current home, they buy a new house first, move out, then walk away from their current residence. This is called a “buy and bail”.
Many banks are aware of this situation and try to tighten up the guidelines and avoid financing to this type of borrowers. That is why when someone is buying a house when they already own one (and don’t plan on selling it), you better have a very good reason explanation why. YES, we will need a letter of explanation again (yeah, I know I know). Here is some common explanation on why people are keeping their current residence that is acceptable by most banks:
- Increase in family size: Example – When there is a new addition to the family, such as a new-born child or your children are all grown up and need to have their own room
- Decrease in family size: Example – Kids graduated from high school and they are moving out, parents feel there isn’t a need for a big house and wants to downside
- Need a smaller house: Example – Elderly wants to live in a one story home vs two-story. Borrower is getting older and is having a hard time climbing to the second floor
- Relocation: borrowers is relocated by current employer and wants to move closer to new work location.
There are a lot more to this than what I am telling you on this article. If you have a unique situation, feel free to ask questions. I will be more than happy to help you.
Also forgot to add that I guess the VOR was an issue as we did not have it to provide (see above posts for reason) My husband does have a rental history, it was from a long time ago like before I purchased this house though. So what is the cutoff for the rental history, I am assuming the last 2 years? His would be from like 2004?? thanks
If you and your husband live at current home for at least 2 years, lenders should not be asking for a VOR.
Hi,
I wrote to you about a month ago and now I have a new situation of which I need your professional input. My hubby was denied a FHA loan from one mortgage company 2 months ago and since then we have tried to go through another builder’s lender. The loan officer initially said that the loan wouldn’t work until my hubby student loans reflected being rehabbed which they are and we are just currently waiting for a lender to pick them up and have provided a letter to the loan officer from the office that holds the loans that they will in fact be removed from default status after he finishes the rehab program and picked up by a lender. So the loan officer ran hubby numbers through the automated FHA system and she said that it was accept/eligible. She asked for supporting documents and has sent them into underwriting but has said that getting the auto approval is a great sign and that we will not need VOR or alternative credit because we got the auto approval. Can you tell me more about how auto approval works for FHA and what it means, is it a good thing? Is it a little easier to get an approval from an underwriter with the auto approval ? If you need more info on credit score and income etc I will be happy to provide. Thanks in advance.
Hi Michelle welcome back. When we enter all loan datas (income, assets, credit info etc) into a underwriting system, all info will go through what we called the FHA scorecard system. If the scorecard system issues a scorecard approval, we will “usually” only request basic documentations in order to move forward with the loan. Documents such as VOR will not be required. However, if the system gives us a refer, that means we need to manually approve the loan. There are some factors in the loan that is outside the box and will require additional documentations in order to move forward. At that point in time, we will request for VOR and possibly additional documents to support credit profile. Does that make sense?
Hi I just wanted to follow up from my above post to you as promised…my husband was denied the fha loan from the mortgage company. The loan officer just said that even with the good financial ratios etc. and credit score of 621 that his credit strength was in question?? They said he would need a co-borrower. I am confused as to several issues that came up during the process however, as I thought that if credit was not as strong other areas that are stronger could compensate is that true? Also how many open tradelines do you normally have to have and for how long? Lastly, if a mortgage company denies the fha loan , is it worth going to another lender like a bank as I heard that wells fargo offered a program that started as low as 600 credit score? Sorry for all the questions, but nothing has been explained to us in detail and the loan officer has stopped returning emails as he is swamped with others I guess. Thanks in advance.
Hi Michelle. It is extremely hard to determine what is considered as good compensating factor without knowing all the facts and detail. When it comes to making a decision on FHA loans, it all depends on the overall picture of borrower’s credit, income, debt to income ratio, etc. “Normally”, we want to see a minimum of 3 tradelines for a minimum of 2 years. But if HUD likes the loan and gives us a scorecard approval, we are ok with less trade history.
When a mortgage company denies a loan, yes you can try applying with another lender. Before you do so, be realistic if your decline reason can be overturned by applying with a different lender.
Oh okay I understand. Thanks so much for your help, so glad I found your site!! I will update you on the outcome. Again thanks so much.