how hard to qualify for mortgage on second home

chicagoerinJune 26, 2010

Hello-my parents currently own a 280k house that they owe 230k on, my father is on medical disability and earns $1,000/month, my mom is 64 years old and earns 100k but will be retiring soon. They are thinking of buying a 160k house with 20% down to rent out. Do you think they will have a hard time qualifying for a second mortgage? Credit score is 810. They are going to contact a lender Monday, but I am curious about your thoughts. I keep hearing they are making it harder to get mortgages in general, but I am not seeing any real life examples. My sister just refinanced her 530k house, they have probably 80k equity, have a credit score of 820 and her husband makes great money, however I was shocked to hear that the bank they are refinancing with (not the one who currently holds the mortgage) didn't even come in the house to appraise it. Seems do they know (the bank) what they are buying???

Thoughts on my parents?

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Your sister's husband is young (presumably) and has a lot of time to pay off his mortgage, your parents don't (and the bank knows the difference). If they were my parents I would urge them to simply sell the house they're in on which they seem to owe a lot of money with not much time to pay it off, and rather than taking on what can be serious headaches with renters, just downsize themselves to a more manageable set-up. It's common for appraisers to only do 'drive-bys' so I wouldn't think that's an issue. The way the economy is, and the fact your parents only wage-earner (Mom) is retiring soon would be definite pushes for me to cut future risk of any kind, rather than looking for new, but uncertain ventures.

    Bookmark   June 27, 2010 at 6:35AM
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Thanks Larke-I agree but it might fall on deaf ears....will give it a shot.

    Bookmark   June 27, 2010 at 7:54AM
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They should also consider if they really want to be landlords at their age. Do they want to handle the middle of the night phone calls when the hot water heater breaks?

    Bookmark   June 27, 2010 at 8:04AM
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I mean this as in non-confrontational way as possible, but what makes your parents think this will work?

I would be nervous facing down retirement with a house that still had six figures owed on it. Never mind taking on additional liability with a second mortgage.

Also, I am guessing that they have in their heads that landlording is "a nice little hobby that makes money". Unless they have some solid experience that hasn't been mentioned, I think they're going to be sorely disappointed.

    Bookmark   June 27, 2010 at 9:34AM
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"20% down to rent out"

Will the local rental market support an 80% mortgaged house?

You need to be able to rent for MORE than the principal, interest taxes, and insurance with some extra for repair expenses) to 'make money' at renting.

The rental market is coupled to the overall housing market in an area, but there are other factors that are NOT in common.

How much do single family houses rent for?
This and the amount of money lenders demand as a down payment on investment properties (20% is the minimum) determine the ability to create a net positive cash flow.

It should really be before taxes (and depreciation) unless you are willing to throw more money into the place over and over (possibly monthly).

If housing values are appreciating in the area it can be worth net positive cash flow after taxes, but you do not want to stay in that hole for very long.

If you do not know how to make basic repairs (and are willing and able to make them) it takes even more rent to cover routine maintenance and stay afloat without injecting more cash into the house.

    Bookmark   June 27, 2010 at 10:32AM
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Hi Erin,

Do you think they will have a hard time qualifying for a second mortgage?

It depends on many more factors you haven't disclosed, such as their post-retirement income streams, *WHEN* retirement is planned (the banks can look forward no further than 3 years, and generally only ask for certainty of 2.) It also depends on their assets/reserves.

It does *NOT* matter how old they are... it is illegal for lenders to underwrite based on age (other than the borrower being old enough to legally be in contract.)

Seems do they know (the bank) what they are buying???

You said your sister is refinancing, not buying. The refinancing bank is apparently comfortable with the comparable values of similarly sized homes in that neighborhood. They don't have to see the color of the wall paint or the cupboard pulls.

Thoughts on my parents?

Mildly curious what their desires & plans are... and their understandings & assumptions of the project they are pursuing. Landlording as a business is certainly not for everyone... on the other hand, the "3 AM broken toilet" story is an old wive's tale for the most part (I've owned rentals for almost 10 years, and have *never* had an after-hours emergency on any of them... HOWEVER, I also have several handymen on my call list in case we ever do. MUCH depends on the quality of tenant you rent to.)

Dave Donhoff
Leverage Planner

    Bookmark   June 27, 2010 at 5:11PM
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