Ask the broker: Rental income and mortgages

Q. My daughter and son-in-law want to buy a bigger house. They have owned their current house since 2003 and have never missed a payment or been late. They have excellent credit, sufficient income to qualify for another house and someone who wants to rent their current home for three years. The problem is their property is underwater and lenders will only count rental income to qualify for the new home if the current property has been rented for a year or there’s 30-percent equity. What can they do?

A. If the cash flow is positive then lenders should be elated that the property can be rented for three years, but that’s not the case. They worry about equity because owners in a new home may be tempted to walk away from the old one. They’re concerned about the rental because even with a lease, there can be problems with management, repairs, etc.

Moving from one house to another means that it’s virtually impossible to count rent from the first property unless you’re already living somewhere else. As to 30-percent equity, that’s out-of-the question for most owners who bought with little down and have seen property values decline.

Given that financing for a new home is not going to happen, would it make any sense to expand the current residence?

Q. Is there any advantage to paying mortgages before due dates, say before the first of the month?

A. You’ll sleep better and your lender will be very happy.

A number of real estate brokers have recently told me they know of situations where existing lenders have contacted them to offer better deals, new loans with lower rates plus a promise to pay virtually all closing costs. Why? Because lenders can resell the loans in the secondary market at a profit when borrowers have strong credit. Unfortunately, not all lenders reward good financial behavior.

Ÿ Email Peter G. Miller at peter@ctwfeatures.com.