Stricter mortgage rules nearly wrecked the purchase of our rental condo

Ingrid Case picture

The deal is almost done.

We're nearing the end of paperwork hell and set to close on our Minneapolis rental condo soon.

But a change in mortgage rules nearly capsized the whole project. If you're thinking about buying an investment property, this is something you need to know about.

During the housing bubble, real estate investors could add 75% of the property’s projected rent to their income, to help them qualify for a loan.

(Only three-quarters of the rent counted because the bank assumed that the property would be vacant at least some of the time. You should assume the same thing.)

But now, our mortgage broker says, we can’t do that.

We had to show that we could afford the loan on our new rental property without counting any of the income we expected it to generate.

I had to qualify for a loan as if I were buying the property for myself, maybe as a vacation home or office space.

We don't have a lot of debt, but we still can't afford a second home. Without a credit for 75% of rent, I couldn't meet bank rules for debt and income ratios.

I was done.

There was an exception, the broker told me.

If I could put 25% down and show the lender a signed lease from a new tenant, she thought I could still qualify for the loan.

The down payment was no problem, but I couldn't imagine why the seller would let me start showing a property I didn't own to prospective tenants, or why a prospective tenant would sign a lease agreeing to live in a property that the landlord didn't yet own.

I was up nearly all night, mad as all get-out.

I understand why underwriters are less than excited about investment properties that depend on tenants they don’t have.

At the same time, a system where you can only buy the properties that you can afford to leave unrented is one in which the rich get richer, but no one else gets a foot up on the investment real estate ladder.

If you're somewhere in the vast middle and want to practice a little microcapitalism in the hopes of making your own family more secure, you're stuck.

A coincidence saved me.

The seller's agent called my agent and said that, if I wanted to make an offer, I should do it soon. Otherwise the seller, who was tired of paying her own home loan on the property, would find a tenant.

A tenant? They wanted to find a tenant? That was excellent news. The seller found a tenant, who signed leases with both of us. They'll give me his damage deposit and prorated rent at closing.

The deal was back on.

I don't have great advice on getting around this snag.

You could save up enough money to pay cash. That's not stupid — the return on investment is a good one — but it does kind of defeat the idea of building an asset that pays for itself over time. And prices will certainly go up while you save $100,000 in cash.

You could try to luck into the same sort of situation I found. Or you could go with what's probably the best scenario: looking for properties that are already rented. Those tenants might be very happy to sign a new lease with a new owner.

Either way, this particular gateway to building financial security has gotten narrower.