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.