Expert: Jessica Bryan - 12/1/2010

Question
I am thinking of building a house on land I bought a year ago.  However,
that plan was based upon selling my current home, which has gone down in
value about $50,000.  It seems unwise to sell it at this time, so I am
thinking of refinancing it, holding on to it and leasing it.

If I refinance it, I could  lower payments so they are less than the lease
income.   My question is:  What criteria do banks use regarding debt to
income ratios etc., when considering leased property?  Will a bank (or credit
union --I´d rather do business with them)  still count the monthly payments
as debt even if I have a lease contract with a renter?  

Answer
Hi Juan;
Your lender will take into consideration that you have an "income" property that generates additional income as long as you have a signed lease.  However, they do not take the full amount of the payment into consideration--they only do a percentage of the total.  The justification for this is because there could be defaults in payments.  A bigger problem is getting a loan to build a home if you haven't sold your other home.  Getting qualified is very difficult and complicated these days.  My suggestion is to talk to your credit union as soon as possible.  The loan officer will help you decide how to proceed.  Loan regulations and requirements are changing daily and it is essential that you speak with someone whose business it is to keep on top iof these rules and regs.

The other suggestion I have is to research your building costs before proceding.  Talk to several builders.  My husband and I own a home design business and we find that after designing the home for our clients they take the design to several builders and get estimates.  These estimates vary enormously.  Many people who are told one price find later that the price goes considerably higher than was estimated.  There are ways to protect against this and I would be happy to advise you about this if you are interestedf.  This would require a longer explanation and discussion than I can do here but you are free to contact me again about this.

Best wishes,
Jessica Bryan