When a house is upside down, it means you owe more on the property than it's worth. If you sold the house, you wouldn't get enough out of it to pay off your mortgage. This can make you feel trapped when you need or want to move, such as for a job transfer or when your family outgrows your existing home. With good credit and a sizable down payment, you can still buy another home without selling the first one.
Why It's Hard
When the United States began dealing with a recession in 2007, the housing market was one of the hardest hit areas. Home values plummeted, leaving many people underwater on their homes. At that time, lenders often allowed homeowners to provide valid lease agreements on the homes and count that rental income toward their gross income amounts. After using the lease agreement to help them purchase a new house, some people stopped paying the mortgages on their old homes, walking away and accepting a foreclosure rather than continuing payments in a form of strategic default. This hurt the mortgage industry even worse, causing it to rework lending requirements.
Renting First Home
When you're upside down on your home and want to rent it out while you move into a new house, that's still a possibility, but it's harder than it used to be. Lenders won't allow you to use rental income to calculate your gross income; you must be able to afford both mortgages on your existing salary. Some require you to have a valid lease agreement, proving you have someone ready to move in. This can be especially problematic if you're building a new home -- you often must wait months for the house to be completed, but a builder might not start until you show proof of mortgage preapproval.
Instead of buying the new home as a primary residence, consider purchasing it as an investment property while you rent out your existing home. This sounds backwards, since your first home essentially becomes the investment property, but it might be your only option if you are upside down on the mortgage. You likely can't get a government-insured loan when you're upside down; FHA and similar loans typically require you to have at least 25 percent equity in your existing home to get a loan on a new home. Some conventional loans work for investments, however. These often require a down payment of at least 20 percent, sometimes more. Some might also require you to have enough in savings to pay your existing mortgage for six months in case the home isn't leased.
National banks often have strict lending requirements, and they might not be willing to work with you when you're already upside down on a mortgage. Local or regional banks more familiar with your area's housing market might understand your position better and be more willing to help you with a new mortgage. Credit unions sometimes have different programs than banks, or you can talk with the seller about doing seller financing instead of going through the bank.
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