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A Mortgage Conundrum

by UrbanTurf Staff

A Mortgage Conundrum: Figure 1

A young couple in DC wants to buy a new condo while keeping their current unit to rent out. But that is proving to be easier said than done. With the help of Dominic Turano of First Home Mortgage, UrbanTurf tries to find the solution. See the reader’s question and Turano’s answer below.

Question:

I live with my husband in a junior one-bedroom in Dupont Circle. We’ve been saving to sell my small condo and move to a bigger one as something in between urban living and single-family-raising-a-kid living. We want to buy below the price that we have been pre-approved for, so we can keep saving for our goal – a house.

However, we don’t need to sell my place to upgrade to a larger unit (i.e. we have enough money to keep it and buy another), and given the rental market right now, it almost seems smarter to rent out our current unit which would cover the mortgage and then some.

But we have run into a snag. We were told that unless we sell my unit or buy “substantially up” from our current situation – i.e. a townhouse or a luxury condominium – we would not be approved for a mortgage. The reason for this is that the bank believes that both condos will be investment properties when in fact one will be a primary residence. Buying a much larger or nicer home is apparently an indication that it will be our primary residence.

Is this common and is there a solution?

Answer:

This situation isn’t entirely unusual. At its core, this is an underwriting decision/judgment call, but it is clear that the underwriter does not have the full story. Ultimately, it’s the role of the loan officer to help the underwriter understand what is going on. Underwriters are tasked with ensuring that the loan in question meets company/investor guidelines, and sometimes there is a gray area in the guidelines for the loan approval.

However, it sounds like the buyer has advantageous mortgage terms and a clear reason to purchase another property. If they were purchasing a SMALLER unit, the question/concern from the bank would be more appropriate and easier to understand. However, it sounds like this couple would be purchasing a unit at least similarly sized, if not moderately larger.

If the loan officer helps the underwriter understand what’s happening, a letter of explanation from the client should alleviate the problem and allow them to move forward.

If things have been explained clearly and the underwriter is still digging in their heels, a request that the file be escalated to an underwriting manager is a possibility. From there, the more senior person may make the call that the purchase scenario is a good one and approve the loan.

If these avenues do not work, the couple could bargain with the bank to provide a signed lease and security deposit for the property that they would be renting, but that may not work as the bank is suggesting that both units will be investment properties. The borrower could also go to another lender, as most have the ability to run loan scenarios past underwriters for review prior to bringing the loan in for full review. If the couple decides to do that, I’d suggest that they ask for a pre-application scenario review. As it’s a judgment call, another underwriter could look at the situation differently.

See other articles related to: urbanturf reader asks, mortgages, investment properties

This article originally published at http://dc.urbanturf.com/articles/blog/a_mortgage_conundrum/5321

7 Comments

  1. B said at 8:45 pm on Thursday March 22, 2012:
    This is a strange situation, but one that sounds like it could be resolved with a letter to the underwriter as Turano said. If the reader gets it resolved, please report on it.
  1. my 2 cents said at 9:50 pm on Thursday March 22, 2012:
    I understand what you are trying to do, but I also understand the bank's perspective. I'm inclined to agree with the bank. The new property you are trying to purchase will be the same size as your current or moderately larger. You don't plan to "stay put." If you're buying a place with the intention of selling it soon thereafter, even if it's your primary residence, then doesn't it make sense that it's an investment property? And doesn't it make sense that banks are becoming conservative given the housing market mess (people buying 'primary residences' with the intention of living there only for a bit and hoping to make a profit from the sale) On the other hand, if you and your husband are responsible, have good credit, and have the income/down payment for two condos.. I'm sure you'll have no problem getting lending. Your loan just might not be as cheap as if you were buying a place you intended to stay in.
  1. biggie said at 12:09 am on Friday March 23, 2012:
    Sounds like you need to talk to a different bank. I'd try Dave Kalinock at Acacia Federal (703-506-8127).
  1. SEM said at 4:34 pm on Sunday March 25, 2012:
    We recently faced a similar issue. Strongly suggest you consult with Roger Beckman at First Savings Mortgage Corporation. In any case, a similar locally focused lender may be better able to judge your situation and accept the right explanation than a larger national bank... Good luck!
  1. C T said at 12:05 am on Monday March 26, 2012:
    I recently ran into a similar dilemma. When all is said in done, in order to qualify your rental income on your old place as actual income, you have to have 30% equity in it. Otherwise you have to be able to show you can financially support both mortgages without the rental income. No way around this. Good luck!
  1. KES said at 1:19 am on Monday March 26, 2012:
    Hey Urban Turf - thanks, hope you do more of this kind of thing. I found it really useful in trying to get some kind of insight into mortgage underwriting mystery guidelines. In fact I’ll give you your next conundrum. I own a condo in a boutique (4 unit) building. All the other units are rented out right now (to some long term tenants). My realtor said I will have a hard time selling my unit, which I’d like to do, because no buyer would be able to get a loan to purchase in a building where the other units are not owner occupied. Is this true? Any exceptions out there? Am I just stuck? Another mortgage conundrum that I can’t see a way around. HELP!!!
  1. Mark Wellborn said at 3:11 pm on Tuesday March 27, 2012:
    KES, We are looking into this question and hope to have a suitable answer for you soon. Mark Wellborn

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