Can I Rent Out a House That Still Has a Mortgage and Purchase Another Home?

As the housing market continues to crater, homeowners across North America and beyond are looking to boost their incomes by renting out their current residences and purchasing new homes. This can be done for a variety of reasons.

For many families, the added rent income might provide some much-needed financial breathing room. In fact, many small-time real estate investors rent out their primary residences as a precursor to investing in multiple rental properties. For others, this arrangement may arise out of necessity: Some growing families may simply be unable to live comfortably in a starter home.

In order to obtain a mortgage to purchase a second home before selling your old house, you'll need to submit to a rigorous analysis of your finances. Most lenders refuse to provide new mortgages to borrowers who are unable to pay at least 20 percent of the home's value up front.

The Federal Housing Administration adheres to even stricter capital requirements. In fact, the FHA generally permits its clients to hold just one of its mortgages at any given time. If you have an FHA mortgage on your original home, you may not be allowed to obtain another FHA loan for the purchase of a second home until you've paid down this original balance.

There are some exceptions to this rule. If your job takes you to another part of the country and you wish to retain your original house, the FHA may permit you to take out another mortgage. Likewise, the FHA may issue a new mortgage when your family has clearly outgrown the original home. In both cases, you'll need to meet stringent equity and income requirements.

Before you rent out your old residence and purchase a new one, you may wish to consider absolving yourself of personal liability for tenant disputes. You can do this by transferring ownership of your newly-assigned rental property into a wholly-owned LLC. To authorize the swap, you'll need to file either a quitclaim deed or warranty deed with your local real estate assessor. This document entitles you to transfer the property out of your name and into the portfolio of your LLC. Keep in mind that such a transaction might trigger your mortgage's "due on sale" clause and cause your mortgage lender to demand a lump-sum payment of the balance remaining on your loan. However, most lenders choose to ignore this clause for borrowers who remain up-to-date on their mortgage payments.

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