Real Estate - 2nd property

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Topic Author
iridium_red
Posts: 41
Joined: Sun Nov 16, 2014 8:06 pm

Real Estate - 2nd property

Post by iridium_red »

Folks,

My wife and I bought a condo a couple of years ago. We stayed there for sometime, but had to move in with family because of a death in the family and associated reasons. Since then we had rented it out.

Now my wife and I switched jobs and want to move closer to the office that is near both of us (mid-point, if you may). So we were thinking of buying a single family in the new area. While looking at down payment and other financial implications, we were not sure how this would work:

- 1st property - 200k condo @ 4.626% (we put 10% down), and currently rented.
- 2nd property - thinking about something around $500k. When I asked around, mortgage companies said I had 2 options:

1. the 1st property is considered my primary residence. If I go in for a refinance, they would consider this an investment property. Since we are breaking even on the rent, we don't mind keeping this the way it is.
2. Because of point #1, the 2nd property will be considered an investment property. This would require a 25% down payment. On a 500k value, I have to put down $125k. And instead of an interest rate around 4.25% for primary residence (as of last week), I would be paying around 4.7% for investment property.

The questions I have are:

1. If I refinance property 1, I declare it an investment property. This will increase my mortgage rate.
2. If I follow point 1, above, will I be able to buy property 2 as my primary residence with a lower down payment and lower interest rate? I figured I can increase the interest rate on the condo than on the higher priced single family.

Please let me know your thoughts, as I am not sure how to best approach this.

Thanks very much.
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powermega
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Re: Real Estate - 2nd property

Post by powermega »

Your primary residence is the property you actually live at, or intend to live at. You could buy a new house and get a primary residence mortgage for it. The fact that your condo is rented out doesn't change any of that. The condo is NOT your primary residence. You're right that a mortgage company would likely charge you a higher rate on an investment property (the condo), so refinancing that mortgage might not put you in a better mortgage than the one you already have, like you said.

My wife and I went through something similar. We refinanced the mortgage on the condo we lived in at the time, but then got pregnant not too long after the refi and bought a new house. When we bought the house, we filled out the new mortgage application as if it was going to be our primary residence. The lender did not care about whether the condo was a rental, a second home, or a previous primary residence. They did care that our incomes were able to support both mortgages assuming no rental income at all. You should not need to refi your condo mortgage just to apply for a primary residence mortgage on a new home either.

When you fill out the mortgage application, you do sign that statement saying that you intend to use that property as a primary residence for at least a year, and you should be honest about that. It's also another thing if life circumstances change dramatically, which it did in your case and mine.
Even a stopped clock is right twice a day.
rayson
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Re: Real Estate - 2nd property

Post by rayson »

If you have a rental lease on property 1, a new lender should be able to give you a primary residence mortgage on property 2. There shouldn't be a need to refinance property# 1. I believe the catch however is that you will need to live in property# 2 for a "reasonable" time before you buy a single family property. The new terms obviously will need to be confirmed with the new lender.
Bacchus01
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Re: Real Estate - 2nd property

Post by Bacchus01 »

It's your call on whether you tell them that the condo is rented. You should tell them, as if you don't it is possible for them to call the loan. That is highly unlikely, but it is possible.

Or, you simply say you are buying another primary residence and the condo will be a second/vacation home. There should be zero issues with this. Neither must be listed as an investment property. However, one of them SHOULD be listed as an investment because that's what it has become.
Topic Author
iridium_red
Posts: 41
Joined: Sun Nov 16, 2014 8:06 pm

Re: Real Estate - 2nd property

Post by iridium_red »

I had posted a reply, but for some reason it didn't show up -

Thank you very much everyone. I have a couple of follow-up questions:

1. If I go ahead with finalizing a second residence, what interest rate would I be eligible for - would it be higher, as I already have a rate for a primary property, which is now rented?
2. Any particular process for formally declaring the first property? Is it assumed that the condo is investment property to banks, and would they increase the mortgage rate on my new property because of this?
3. Any thoughts on how this might affect my down payment amount for the second property? I put down 10% for my condo. I am assuming it would not be the same this time as well?

Thanks again!!
niceguy7376
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Re: Real Estate - 2nd property

Post by niceguy7376 »

When we were in this situation, we did not do anything with the loan of existing property. We completed the mortgage loan as loan for primary residence and informed that we have another mortgage and that the property type is investment.
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Kosmo
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Re: Real Estate - 2nd property

Post by Kosmo »

iridium_red wrote:1. the 1st property is considered my primary residence.
Not true. If you do not live there, it is not your primary residence. Wherever you currently live is your primary residence whether you own or rent the place.

We did something similar, we bought a new house with the intent of keeping our existing house and renting it out. The lender didn't care what we did with it, as long as our income supported both mortgage payments and associated property taxes/insurance. They did ask me to write a letter stating that our intent was to rent out our existing house, but that was more of a formality than a requirement. Having the 1st property in no way affected the mortgage rate or term of the 2nd because we intended to use the 2nd property as our primary residence (and signed statements verifying that intent).
SDBoggled
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Re: Real Estate - 2nd property

Post by SDBoggled »

Not sure if I read correctly, but it seems the new home is going to be your primary residence and just say that on the mortgage application should mean that you get the owner occupied lower interest rate on the larger loan, so total interest should be less (regardless of whether you re-fi condo)??? ... and the capital gain up to $500k is tax free (2 years).

Haven't interest rates dropped since you bought the condo?

Those rates sound a bit high to me, but I have not been watching since I re-fi'd last year.
Topic Author
iridium_red
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Joined: Sun Nov 16, 2014 8:06 pm

Re: Real Estate - 2nd property

Post by iridium_red »

Thanks everyone for your inputs. I will research and keep these points in mind.

Hi SDBoggled,

When we started looking for houses in 2012 end, the rates were around 3.5%, and you are right in this, But when we finalized on the one we liked around May - June 2013, the rate had gone to 4.85%. The bank gave us 4.65%. The rates now for new house is 3.9% for 30 year fixed. We did file initial papers for refinance last year with a mortgage company and they came back saying we don't live there any more as our licenses and current address is different from the condo address (due to family situations mentioned earlier). Because of this, they came to realize it was an investment property, and I got a higher rate of 4.25% for refinance, with 20k down. Not getting much from this situation, we didn't go for it. That's the reason I got a little confused on how this worked, and you folks have been great!! :happy
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Meg77
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Re: Real Estate - 2nd property

Post by Meg77 »

Hi! I just wanted to chime in and clarify a few things. I'm a banker and also just bought a new home and converted my old condo to a rental property so I can give some insight.

Whether a property is legally your homestead, your second home, or an investment property has nothing to do with the financing terms you have on any loans; it has to do with how often you live there (and, in the case of a second home, how many miles away it is from your homestead). Banks only care about the property in question when you're applying for a loan; at that time they will ask you to sign to verify that you plan to live there (in which case you will get quoted homestead loan terms) or whether you plan to rent it out (in which case you'll get rental terms). They don't care what terms you have on any other existing mortgages, except to make sure your income covers the payments.

The terms you're quoted on the new loan will not be impacted positively or negatively based on the other loans you have. You don't have to formally "declare" anything relating to the condo except on your tax return to the IRS. When you convert a homestead to a rental property, you do not have to refinance the loan or alert your lender. Now if you want to refinance the condo at any point, you'll have to admit it's a rental and you'll only qualify for a rental mortgage, as you found out. But on the flip side if you want to buy a new home to live in you will receive homestead financing terms again, even if you still have them on previous homes. Lots of people rent out their homes when they move and buy new ones, rather than selling; one big benefit of doing this rather than purchasing properties as rentals is that you get homestead financing terms on all your investment properties.

As for your new home, you can certainly put down 10% or even less to purchase the home. But you'll have to pay PMI and settle for a higher rate if you don't put down the standard 20%. That's probably OK and can still make sense - you can also do a 80% mortgage and combine it with a 10% second mortgage in order to avoid the PMI premium. Not all lenders can do that but some will.

Good luck!
"An investment in knowledge pays the best interest." - Benjamin Franklin
Topic Author
iridium_red
Posts: 41
Joined: Sun Nov 16, 2014 8:06 pm

Re: Real Estate - 2nd property

Post by iridium_red »

Thank you so much Meg77 - your inputs really helped. Thats exactly what I was looking for, for guidance. Will follow your key points when we are ready to make this change.

Thanks everyone for your help!! :sharebeer
Topic Author
iridium_red
Posts: 41
Joined: Sun Nov 16, 2014 8:06 pm

Re: Real Estate - 2nd property

Post by iridium_red »

Hello everyone,

My wife and I have finally seen a couple of houses that we both like. We are currently trying to decide on THE one, and hope to make a decision in a day or two.

In parallel, wanted to get your thoughts on some issues relating to mortgage do's and don'ts. From my previous experience, we were blind sided with closing costs close to $3k. The mortgage agent said there would be none, but put it as administrative/ document costs, which we didn't scrutinize enough, given the numerous other things we were tracking. It was our first house purchase, and anxiety was high as well. Also the final documents came an hour before our appointment with the lawyer on the closing date. So time was not on our side, unfortunately.

Learning a lesson from this, had a couple of questions:

1. How to ask/ ensure no closing costs?
2. Can I get more time (ideally the next day) before I get the final documents and the date of closing. Is that something I can request?
3. Any other items that you think might hit me new this time which someone has experienced?

The house value is in the $600k range. So any $$ we can save will help us with the mortgage/ other expenses.

Thanks very much. :happy
WhyNotUs
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Re: Real Estate - 2nd property

Post by WhyNotUs »

The terms of closing are set in your offer, place a condition on the offer requiring closing documents X days prior to closing.

Not sure what you mean by closing costs but there is a declaration delivered prior to closing. In my state, there is an estimate of closing delivered in advance when contract is signed. I would not typically expect it to be $0 as there are taxes and other costs to be addressed. If you have a concern, work to get an estimate up front and put a maximum as contingency.

Understanding title commitment and insurance exceptions is critical in some situations. People rarely look into it.
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niceguy7376
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Re: Real Estate - 2nd property

Post by niceguy7376 »

The GFE (Good Faith Estimate) that is initially provided before you lock in the rate will list all the costs associated with the loan process. Some of these would be escrow related as well and hence should not be considered as part of closing costs.

The final HUD that you should get atleast a couple of days before closing date will confirm all the details. You might not have noticed these in the first merry go round but can now keep a tab of the costs this time.

Do remember that there is cost of time associated with loans and someone needs to pay for that time of people. so a no closing cost loan essentially means that you might not need to bring money to the table but the costs might have been factored into the apr or into the loan.
Jack FFR1846
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Re: Real Estate - 2nd property

Post by Jack FFR1846 »

Why not sell the condo? Frees up money to pay for the new house, relieves the headache of being a landlord and eliminates any questions about where your primary residence is.
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Topic Author
iridium_red
Posts: 41
Joined: Sun Nov 16, 2014 8:06 pm

Re: Real Estate - 2nd property

Post by iridium_red »

Hello everyone.

My wife and I finalized on a house, and the attorney review is complete as well. I have 2 questions on mortgage:

1. How many mortgage companies can I talk with regarding rates? How bad is the result of multiple credit checks on my ssn?

2. How good is the good faith estimate the mortgage companies give? Are there any extra areas they can add as fees to increase the costs of the mortgage? Anything I should watch out for?

Thanks for your help. Advanced HAPPY THANKSGIVING!! :sharebeer
niceguy7376
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Re: Real Estate - 2nd property

Post by niceguy7376 »

Any hits to your credit within a 14 day window for mortgages is considered as one hit.

Good Faith Estimates should be as per the first word of the name, GOOD

In Last few months, the form was redesigned to make it easy. There should NOT be any hidden fees.
Topic Author
iridium_red
Posts: 41
Joined: Sun Nov 16, 2014 8:06 pm

Re: Real Estate - 2nd property

Post by iridium_red »

Thank you very much for your feedback.

For the GFE, are you referring to the form the mortgage industry uses? That has been updated? I'll check with the documents from my previous purchase just to be sure.. :happy

Thanks again.
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