Spring Break
Settle first property before acquiring a second
Jessica White/DC Columnist
Issue date: 4/29/07 Section: Business
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Dear Ms. Mortgage Maven,
I work for the federal government. My wife and I bought our first house at the height of the market. We paid about $500,000 for the property and financed 100% of the purchase price.
Three months ago, after the birth of our first child, we bought another house for $600,000 that better accommodated our family. (My wife also stopped working at that time.) We put no money down on that house as well and got 100% financing. We are renting out the first house for $3,000/month with a rent-to-own agreement with the tenant.
The tenant makes $50,000/year, has a 600 credit score and has other people living with him to help pay the rent. Currently, it is rented for $700/month more than comparable houses in the neighborhood. However, the rent we receive is not enough to cover the mortgage payment each month (we are short by another $700/month). We would like to sell the property to him now, even if it means we have to come with cash to the table (but we do not know where we would get the money from). The house is currently worth about $50,000 less than what we paid for it. We do not know where we would get the extra money to bring to the table to sell the house.
We are in a real jam. We want to unload the house because we have to pay about $700 each month to carry it but to unload we have to come up with $50,000. What should we do?
Thanks for your advice.
Abel N.
Dear Abel,
You are in a no-win situation. And so is your tenant. Essentially, you cannot afford to sell (you do not have the $50,000 needed to bring to the table), and he cannot afford to buy the property, for which he is overpaying each month in rent on the assumption that he will someday own it.
Since you do not have the $50,000 necessary to come to the table if you sold it today, the good news is that your tenant has little if any chance of qualifying for a loan. His salary does not support $450,000 worth of purchasing power. With no money down and a 600 credit score, he would have much better luck trying to buy a $200,000 property, not a $450,000 property. Some loan products will allow for boarder income to be used to qualify for the loan. However, generally speaking, the boarder has to have twelve months of cancelled checks to prove that s/he is living with the borrower and has contributed to the living expenses for an entire year, and demonstrate that the living arrangement will continue. Even then, the lender will only count 70% of the boarder's payment. For example, if the boarder paid $500/month in rent, the tenant/borrower would only get credit for $350 towards his income on his application.
I work for the federal government. My wife and I bought our first house at the height of the market. We paid about $500,000 for the property and financed 100% of the purchase price.
Three months ago, after the birth of our first child, we bought another house for $600,000 that better accommodated our family. (My wife also stopped working at that time.) We put no money down on that house as well and got 100% financing. We are renting out the first house for $3,000/month with a rent-to-own agreement with the tenant.
The tenant makes $50,000/year, has a 600 credit score and has other people living with him to help pay the rent. Currently, it is rented for $700/month more than comparable houses in the neighborhood. However, the rent we receive is not enough to cover the mortgage payment each month (we are short by another $700/month). We would like to sell the property to him now, even if it means we have to come with cash to the table (but we do not know where we would get the money from). The house is currently worth about $50,000 less than what we paid for it. We do not know where we would get the extra money to bring to the table to sell the house.
We are in a real jam. We want to unload the house because we have to pay about $700 each month to carry it but to unload we have to come up with $50,000. What should we do?
Thanks for your advice.
Abel N.
Dear Abel,
You are in a no-win situation. And so is your tenant. Essentially, you cannot afford to sell (you do not have the $50,000 needed to bring to the table), and he cannot afford to buy the property, for which he is overpaying each month in rent on the assumption that he will someday own it.
Since you do not have the $50,000 necessary to come to the table if you sold it today, the good news is that your tenant has little if any chance of qualifying for a loan. His salary does not support $450,000 worth of purchasing power. With no money down and a 600 credit score, he would have much better luck trying to buy a $200,000 property, not a $450,000 property. Some loan products will allow for boarder income to be used to qualify for the loan. However, generally speaking, the boarder has to have twelve months of cancelled checks to prove that s/he is living with the borrower and has contributed to the living expenses for an entire year, and demonstrate that the living arrangement will continue. Even then, the lender will only count 70% of the boarder's payment. For example, if the boarder paid $500/month in rent, the tenant/borrower would only get credit for $350 towards his income on his application.
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