I get this question frequently. The folks at Mint.com created a cute infographic image below that can help walk you through the decision. I’m on board with nearly everything here, except they leave one BIG issue out of the picture, and that is current equity stance. In the olden days (think 2007) when you went to buy a second home, the bank didn’t really care how much equity you had in your first home, if you planned to keep it. They figured that if your credit and income supported a second home, you wouldn’t be a risky borrower. You could even off-set part of the double payments by estimating the rents you might collect on the first home after converting it into a rental.
Fast forward to 2011 and things aren’t quite that simple. Banks now have equity requirements on first residences. I have a client who wants to sell his East Nashville home and move onto something larger in a different area. He wants to keep his current home and turn it into a rental property. His current income totally supports the fact that he can afford a larger monthly payment BUT because he doesn’t quite have 30% equity in his current primary residence, he is having a difficult time finding a lender that will grant him approval to move forward with his plan.
Under-writing rules like these are a perpetual moving target. And banks could relax their requirements tomorrow. But you need to think twice about moving up to a new home if you can’t/won’t sell your home at current market value.
This is particularly an issue for folks who are moving into Middle Tennessee from a different areas. In many states like Florida, New Mexico, and Arizona home values have fallen as much as 50%. Many, many of these homeowners are underwater on their values. Perhaps they will be lucky enough to have a corporate relocation package that will pay for some of their loss-on-sale, but those odds are pretty low.
I don’t have all the answers here, and I’ve fallen off into a tangent, but I wanted to make you all aware that this is an issue that doesn’t seem to be going away anytime soon. Still, I think this Mint.com image is pretty nifty…
