Folks,
I have a somewhat complex situation trying to navigate purchase of a third home and I'm looking for additional perspective/sets of eyes to help me figure out best path forward.
- I have a rental property in MD. Rent is $3150, mortgage (PITI) is $1760, interest rate is 2.25% (VA loan). Market value is est. $550k, mortgage balance is $280k. Lot of equity. My Schedule E from 2024 only has 6mos of rental income because I moved to CA in mid-2024. I know I need to file my 2025 taxes to use the full year of qualifying rental income on a future purchase.
- My current primary in CA was purchased last year for 650k, current mortgage balance is 640k, based on market comps (not appraisal) I'd estimate it to be worth about 720-735k. This home is also VA-financed at 5.5% (bought points). PITI is $4650. Based on comps in the neighborhood, property manager estimates I can rent for $4600-4700.
I'm relocating to Virginia in the spring and looking to purchase a third home at 520k, but do not want to sell my current primary...and I'm all out of VA entitlement.
My first instinct was to refinance current primary residence out of VA (to account for more lax DTI requirements) into conventional in order to recoupe my remaining VA entitlement... but lender says underwriting isn't sure if it meets net tangible benefit (NTB) requirements because I'd be accepting a slightly higher interest rate (5.75%) to avoid buying points again. Ends up adding about $230/mo to my payment.
I shifted gears to look towards FHA financing of the new purchase and a different lender told me that because I don't have 25% equity in current primary, FHA won't approve its use as rental income once rented out, and eating the 4.6k mortgage as a liability puts me over 50% DTI.
Looking for overall thoughts on best path forward. I have large cash reserves (Thrift Savings ~500k, but can only access about 50k of that) and good credit (800+) but want to avoid putting any more down towards closing costs than necessary on new purchase). I've never use a HEL/HELOC before and so while I am conceptually familiar, I'm not really sure if laddering equity from other properties is feasible (especially since it'd also be factored into DTI) like if I wanted to make a large principal payment (100k) on the CA house to get it to 25% equity.
That 25% equity requirement for rental income on FHA is brutal when you're so close. Have you looked into a HELOC on the MD property to bump up your down payment on the new place? With that much equity at 2.25% you'd hate to mess with it but might give you more conventional loan options
The NTB thing on the refi sounds like BS honestly - freeing up VA entitlement seems pretty tangible to me but lenders gonna lend I guess
That was my exact response to the lender re: NTB. It's my VA entitlement, freeing it up is a net benefit even if it means accepting a slightly increased monthly payment.
I hadn't considered a HELOC on the MD property, mostly because I've never done it and am not 100% on the mechanics. I'm also leery of the debt to income issue (busting 50% on conventional based on how much liability I have to offset with the rentals).
Third home buying is way different and honestly more annoying. Lenders nitpick your cash flow and reserves harder. I would seriously vet rental history, taxes and long term repairs before moving forward. Don’t assume past experience protects you this time.