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December 31, 2006

2nd mortgages

here's the scenario. first mortgage was opened to purchase a condo, which is currently being rented, ie investment property. want to get a second mortgage for personal residence.

questions:

1.how does the lender decide how much to lend me? since my max. mortgage is based on my salary, down payment, etc, how does the lender work the second mortgage?

2. if i am making $500 bucks over the carrying costs of my mortgage, does this play into the scenario, ie is the lender more amenable to lending me more money?

thanks for everyone's knowledge in advance!

Comments

the rent would count as income, offsetting
the first mortgage's cost. are the mortgages
going to be on two different properties? then
it's not really a "2nd mortgage". the mortgage
on your primary residence is your 1st mortgage,
and the other is part of the costs associated
with your investment property. if you are trying
to get a true 2nd mortgage on the same property,
banks will hesitate having you leverage more than 90% of the value of that house.

Posted by: OE at December 31, 2006 8:57 AM

You are in violation of primary residence clause of your mortgage, so you can lie to the bank and continue the charade or confess to your breach of contract and the lender will foreclose on the mortgage.

Posted by: Anonymous at December 31, 2006 10:30 AM

10:30am, true,it is a violation, but i'm assuming everyone who has an investment property is doing this?

Posted by: Anonymous at December 31, 2006 11:59 AM

What a ridiculous statement

Posted by: Anonymous at December 31, 2006 2:20 PM

Yeah, actually not a ridiculous statement at all. Just an overstatement. Talk to a good mortgage broker. They'll tell you it happens frequently. If you buy a house the bank will want proof that you're going to live there. However as long as you are current on your first mortgage, there's little recourse for the first lender.

One issue - rent is generally counted at 80% while your liability is 100% - $1,000 in carrying costs offset by $1000 in rent is actually a $200 liability - just so's the bank can have a fudge factor for late rent, changing tenants etc.

Good luck!

Posted by: John at December 31, 2006 4:01 PM

isn't it really easy for the lender to run a credit check, see that you have $xx outstanding on a current mortgage and then ask you, is that for your personal residence or investment property...then, you're busted...no??

the OP's scenario must happen so often, i don't know how one could be stopped from getting two mortgages, one for investment, one for personal living...

can someone shed light?

Posted by: Anonymous at December 31, 2006 4:43 PM

is this Casey Serin asking?

Posted by: anon at December 31, 2006 7:37 PM

you have two properites, so get a mortgage on
each property. if one of them is being bought
as an investment, the bank will count some % of the rent.
if you buy a house as a primary home, and later
decide to rent it out, there is no law against
that.

Posted by: OE at January 1, 2007 7:29 AM

OE is incorrect.

Posted by: Anonymous at January 1, 2007 7:04 PM

so in this case, there's no worries about lying to the bank about not inhabiting the residence for which you have a mortgage on?

Posted by: Anonymous at January 1, 2007 9:00 PM

what is the lie here? you are allowed to get
a mortgage for a house that's not the
primary residence.

Posted by: OE at January 1, 2007 9:04 PM

oh okay. i think there was some confusion from the OP's post on first/second mortgages..i think it's cleared up now..

Posted by: Anonymous at January 1, 2007 10:07 PM

The lie is this: if you take out a mortgage claiming the condo is your primary residence and then you subsequently rent it out as an investment property, you are in violation of the clause to maintain your property as your primary residence. The claim that this happens all the time is ludicrous and terrible advice.

Posted by: Anonymous at January 2, 2007 10:32 AM

I would also check your mortgage documents. We took out a primary residence mortgage, and it stipulated that we had to reside in the property for at least one year - not for as long as the mortgage was held.

Posted by: HC at January 2, 2007 12:06 PM

exactly. it is true that you can't rent it out right away, but silly to suggest you have to live there for the length of the mortgage.

Posted by: Anonymous at January 2, 2007 3:27 PM

looks like there's definitely two sides of this argument, which no one can completely agree on.

Posted by: Anonymous at January 2, 2007 5:39 PM

you mean not everyone can agree.
anyway, it makes sense to read your mortgage
docs..it would make sense that eventually
things happen, and you could end up wanting
to rent out your house.. people aren't going
around getting new mortgages when that happens!

Posted by: OE at January 2, 2007 9:46 PM

Just wanted to add my experience, since I've been down this road:

1. The mortgage payment needs to meet what they call the 28/33 rule, meaning:

- your mortage payment divided by your gross (pre-tax) income is less than 0.28, and

- your total monthly expenses divided by your gross incoming is less than 0.33

The total monthly expenses that the lender will use is basically everything on your credit report (car loans, monthly credit card payments, etc), plus the mortgage, taxes, and insurance for the new property. They *should* not add the mortgage on the investment property to your expenses. They should apply the rental income or loss based on your last tax to your income or expense number, or apply a lease to the carry costs (again, mortgage, taxes, insurance, dues) to calculate a net income/loss and apply it to your monthly income or expense. Make sure that the underwriter does this, otherwise it completely skewes the ratio.

I should add that some lenders will go higher than 28/33, but the last time that I did it, they were not making any particularly compelling offers.

2. As you may have figured from #1, you can add $500 to your gross incoming, assuming you can document it with either your last tax returns or a lease.

Just to clarify a few other items:

Unless you're borrowing against the value of the condo, the mortgage on your home is a first mortgage, not a second. The numbering goes by the collateral, not the mortagee.

You should read your mortgage. For what it's worth, every "primary residence" mortgage that I have had required that I:

- occupy the property as my primary residence within sixty days

- occupy the property as my primary residence for one year.

While it is possible that your mortgage is different, I'm three for three on this, so as long as you've had the condo over a year, you're probably ok.

Finally, just a couple of other comments:

-Make sure that you have a story that passes the laugh test for buying the house when you own a condo.

-Even though it sounds like what you are doing is on the up and up, no one will take a second look at your mortgage as long as you make the payments and keep current with the taxes and insurance.

Good luck.

Posted by: Anonymous at January 8, 2007 9:00 PM