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Can I Rent Out My Upside Down Home and Buy Again?

Is your home upside down?

Falling home values and record low interest rates make this an incredible opportunity for many homebuyers.

What if you are a home owner now and you want to take advantage of this opportunity to move into a bigger, better or newer home with a lower interest rate and a lower mortgage payment?

>Selling the home is not really an option if you owe more than the home is worth.  The only way out of this situation is short sale or foreclosure.

Obviously, short sale or foreclosure prevents you from buying again for at least 36 months (if buying using an FHA loan)

Can you rent out your upside down home and buy a new home?

The short answer is “Yes”….but there is a catch.

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In the past, lenders could use a rental agreement to offset the mortgage payment on the rental home – all of that changed in 2008.

A new guideline was designed to keep people from “claiming” to rent their current residence to buy a new home, then let the original home go into foreclosure – many were gaming the system.  This was referred to by Fannie Mae as the “Buy and Bail.”

If you have less than 25% equity and you are using FHA, or 30% equity if using a Fannie Mae conventional loan to buy your new home you must qualify for the full payment on both the current and new homes.

This makes if very difficult because most families cannot afford both mortgage payments.  Even though you are receiving rents – you can’t use that money to qualify for the new purchase.

If your current home is not upside down, there are options.

If you do have equity in your current home, and you are looking to purchase a new home – you may use a portion of rents to offset the current payments, but it’s not black and white.

Find the Right Lender. Find the Right Loan. Get Help Now!

If you have questions about renting our your home to buy new a one, leave your question or comment below and I can address your specific situation.


About the Author

Scott Schang

A 20 year veteran of the Mortgage and Real Estate industry, I am passionate about educating and empowering consumers. I have been writing about consumer protection issues, and making sense of complicated real estate and mortgage topics on this website since 2007

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  • jharden12 says:

    I want to purchase a home for me and my parents to live in.  However I own a townhouse that is  underwater and has a FHA loan.  The townhouse is now rented out. However I have been told  I could not have 2 FHA loans.  Do I need to refinance the townhouse into a conventional loan so I can purchase the new home with a FHA loan?  Help!

  • ScottSchang says:

    miss209 just because you included your mortgage in the bankruptcy does not mean the bank can foreclose on your home.  If you stop making payments on the mortgage and default on the loan, the bank can foreclose.  Bankruptcy protection simply means that the lender cannot then sue you in the event of them taking a loss, or report that loss to the IRS which would result in a tax liability.
    You can definitely ask the lender if you can refinance, but you really don’t have any position from which to “demand lower payments”.  Your original mortgage terms are still in place.
    Hope that helps?

  • miss209 says:

    My mortgage was discharged in BK last year. Can the bank foreclose on my property? Can I demand lower payments from the lender?

  • Vincent says:

    I need some guidance here on this. Back in 2003, I filed BK. Had two mortgages on my home in IL – First with FHA and Second with Non-FHA. Both were included in BK, and, I never reaffirmed. That said, I have always been making payments on time or better all this time.The economy being what it is, I have had to gain work out of state some 2000 miles away. Leaving behind in my home is my elderly mom and disabled son. Both live back in Illinois. Now all this time later I am back on my feet, but, in another part of the country. I do not want to lose my house in IL. But, I also live far away now. I want to rent my house in IL – the house is not under water, but, there is no real equity either. So, can I rent it to someone. As I said, I have not reaffirmed. Will FHA or the lenders have a problem if I am not living there? Will I be able to get another FHA in my neew state? Save my life and help me please… Vince

    • Scott Schang says:

      Hi Vince,
      You can certainly rent your home out in IL and buy a new home. You are still the owner of the home and as long as you’ve kept up on your payments, there is no fear of the lender foreclosing. Including your mortgage in bankruptcy does not mean the home is no longer yours.

      You shouldn’t have any challenges getting FHA financing, although it may require an explanation about why you already have an FHA loan. The only challenge you might possibly encounter a guideline called “buy and bail”. This guideline was created to prevent people from buying a new home at a lower price, then letting their old home go into foreclosure. The guideline requires that if you have less than 30% equity in your current home (in IL) you must qualify for both principle and interest payments for both homes.

      IF you rent the home in IL out and report the rental income on your tax returns for 2 years – then you can use the rents to offset your payments, which will make qualifying easier.

      If you have any further questions, feel free to call me tomorrow on my cell phone 714-336-8286. What State are you planning to buy in?