One of the things that I’ve learned from the media, periodicals, and people I have spoken to is the key to a successful financial future is diversification. Diversification, however, does not only mean diversifying within the stock market itself, or having stocks, bonds, and mutual funds in your portfolio. It also can mean owning real estate in addition to those things. After all – despite the real estate bubble-burst a few years ago – historically (in the United States) real estate has proven to be an excellent investment.
I raise this because many people who seek our legal services have started out owning a multi-family home and then aspire to move to a single family dwelling. When asked what they are planning on doing with the multi-family building (e.g., selling it or keeping it as an investment), the answer many times is the latter. The next logical question from us is, how are you planning on keeping the property and affording your new home? The answer we receive more often than not is (i) the multi-family property is rented and pays for itself and (ii) the mortgage loan on our new property is around the same amount of money we were paying out of pocket at the multi-family home. This makes perfect sense to me, but a mortgage lender may see it differently – which is essentially the crux of this article.
Too often buyers in the aforementioned situation are under the impression that they do not need to sell their multi-family home in order to qualify for a mortgage. While many times this is true, I have seen several instances where a buyer will not qualify for a mortgage unless the multi-family property is sold – even if the said property “pays for itself”. More often than not this has to do with the debt-to-income ratio and/or other factors that the loan underwriters take into account when underwriting a loan. Consequently, the transaction may fall apart because the buyers may not be able to (a) purchase the single family home without a mortgage or (b) sell their home in a time frame that is acceptable to the sellers. This often results not only in two (2) unhappy parties, but many times can lead to litigation.
In light of the above, a buyer looking to purchase a property and keep an investment property should reach out to his/her lender (i.e., mortgage broker or mortgage agent) and ask whether the aforementioned scenario will cause an issue with their ability to get a loan. If it will, the buyer needs to decide whether to (i) go to another lender and see if it holds the same position as the previous lender, (ii) sell the investment property prior to purchasing a home, (iii) put more money down on the mortgage loan, (iv) pay for the home in cash, or (v) stay in the multi-family home. If the above scenario will not impact the buyer’s ability to get a loan, the buyer should do its best to get that in writing at the beginning of the process, to try and mitigate an issue in the future.
*The information in this blog posting is for general information purposes only. Nothing in this blog or associated pages, documents, comments, answers, emails, or other communications should be taken as legal advice for any individual case or situation. The information in this blog is not intended to create, and receipt or viewing of this information does not constitute, an attorney-client relationship.