Lynchburg Business

Thinking about renting your home? Not so fast…

Issue: February 2010 by Kimberly Feldkamp in Inside The Magazine, Real Estate

For most of us, the start of 2010 was all about the new. New diets. New budgets. New jobs. New homes.

At least, a new home was the hope for Lynchburg resident Sam Stroud and his family. The Stroud’s planned to move from their current three-bedroom, two-bath, 3,000 square-foot home in the Sandusky area to a bigger, roomier home to accommodate their two dogs and growing 2-year-old, Brody. And to help with the cost of a new home, the Stroud’s planned to rent their current one. The plan was to borrow against the equity in their current home, and use that money as a down payment for their new house.

“We know plenty of other people who do this, and they made it sound so easy to do,” Stroud said. “For us, it really wasn’t a question of if we could do it. It was more of a question of when.”

So Stroud and his wife, Jill, started the process of looking for renters, as they began looking for a new place to call home. But they quickly found out a new law would prevent them from following their plan to get a new home.

“We didn’t know there was a new law in effect that you had to have a specific percentage of equity into a home before you can turn it into a rental property,” Stroud said.

In their situation, the value of their home was not high enough compared to what they owed the bank. So, for the time being, they’re not going anywhere.

It’s no secret that, as the housing market has taken a nosedive, banks have tightened their lending. In the past, banks would lend up to 100 percent of the value of the home. Today, most banks will only lend about 80 percent of the value. This new law prevents people who are upside down in their current home from walking away from that mortgage, after buying a new home.

A Lynchburg mortgage lender, who chose to remain unnamed per his employer’s request, explains that equity is the difference between what your house is worth, and what you owe on it. He says that in the past three to six years, banks viewed equity very similarly to cash in the bank. But now, it’s much harder to sell your house, and because you can’t cash in your home easily, banks no longer view your equity as a liquid asset.

And these days, most banks want a 20 percent down payment on a new house.

“It had become a common occurrence—folks knew they were about to foreclose on a home, so they’d buy a cheaper home—and this ended up hurting us. We didn’t think we wouldn’t be able to rent our current home,” Stroud explained.

The local mortgage lender says banks are much more conservative now in issuing loans. This is all because of the amount of foreclosures that are currently taking place. Banks now want larger down payments, better credit scores and better debt-to-income ratios.

“We were put at an immediate disadvantage because of other people defaulting on their loans,” Stroud said. “And that really was more of an annoyance than anything.”

This new law could also hurt those who have to move because of a new job, or anyone looking to downsize. That’s why mortgage lenders say it is so important to keep improving your credit scores, and to be aware of the new rules and regulations in place. Most of the new lending changes have been phased in by banks over the last 24 months as banks have continually re-examined their lending practices.

Today, it sounds almost daunting to get a new home, but bankers say don’t be discouraged. There are things you can do and steps you can take to still buy into the American Dream. For first-time homebuyers, lenders advise you to follow two simple steps.

First, pay off all debt. Lenders say to tackle all that credit card debt first, then go for your car loans, and if you can, pay off your school loans before buying a new house. Then, save for a down payment. Lenders say you’ll need at least 3.5 percent, but you are much better off at 10 or 15 percent. In fact, these days, 20 percent down is actually preferred. Plus, the bigger the down payment you make, the better loan you can get.

As for Stroud’s situation, he says it has been more of a frustration than anything, and has plenty of advice for folks who may be thinking about renting their current home and buying a new one. First things first: Do your homework before you head to the bank.

“Know your situation, and make sure everything checks out,” he advised. “We had already bought a house before, so we thought we’d be okay again.”

He says their plans for a new home have been put on hold—at least until spring.

“It’s still a good time to buy, and hopefully we’ll have better luck in the spring, when we put our house back on the market,” Stroud said. “Until then, we’ll just keep improving on our current home.”