Q: Last June, I bought a single-family residence in Georgia with a conventional 30-year mortgage. This was my first real estate purchase.
I was expecting to relocate to Georgia and live in the house with my parents. Both my and my parents’ names are on the title, but the mortgage is in my name alone.
The job opportunity in Georgia fell through, and I never actually lived in the house full-time. My parents continue to live in the house, however.
They are not in a financial position to have the mortgage refinanced in their names. I’m not interested in selling the house in Georgia to anyone else and would like to allow my parents to continue living there. They usually make a payment to me that I put toward the mortgage but this arrangement is informal – there is no lease agreement. When they are unable to pay me, I obviously pay the entire mortgage myself.
Now my boyfriend and I are interested in purchasing a home together in Virginia. This would be my primary residence. I am currently renting.
I’m concerned about the consequences of buying another home. Can the lender that holds the mortgage on the house in Georgia change the terms of the loan because it is not really my primary residence? If I try to memorialize the informal agreement with my parents (to show income and help me qualify for another mortgage) will I be converting my house into an investment property? Can I buy a home in Virginia as a primary residence when I already own a home in Georgia?
Any advice you have would be greatly appreciated.
A: You have already turned your home into an investment property, even though your tenants (your parents) don’t make regular payments. When you go to buy another home, the lender will look at your arrangement as being your sole responsibility, since you don’t actually have a lease showing how much your parents are paying each month. The lender will subtract the monthly carrying cost of this Georgia house from the total amount you can pay each month toward a house (typically 28 percent of your gross monthly income, or up to 36 percent if you have no other debt, like car or school loans).
If you have a lease that shows how much your parents are paying each month, then the lender will use the income to offset some of the carrying costs of your property, and allow you to spend more on your next purchase.
But if you’re buying this house with your boyfriend, the point may be moot. If his income is enough to more than carry the property, your income and expense with the other property won’t be a factor.
As for changing the status from primary residence to investment property, this shouldn’t affect your mortgage. It will be an issue if you decide to refinance the loan. Hopefully, your rate is low enough that you won’t have to do anything for awhile.
As an aside, if you’re purchasing property with anyone to whom you’re not married, you may want to consider a partnership agreement spelling out the terms of ownership, and what happens to the property should you break up. A real estate attorney can help you with this.