SANTA CRUZ (February 27, 2010) - It is an often asked question and you may be able to do it but it might feel like you are putting the cart before the horse. It is a common dream: you want to take advantage of today’s lower prices but you don’t want to sell your home until you know you will have one to move into. While the mortgage industry allows it, the rules are strict and many will not have the capacity to accomplish this feat.

Even though a homebuyer who is buying another home may plan on selling her departure house (the one that is currently owned and occupied by her) as soon as she moves into her new home, the fact remains that the PITI (Principal, Interest, Taxes, Insurance) of the current home still remains an obligation for the homebuyer until the departure house is sold. Therefore, when we calculate the borrower’s DTI (Debt-To-Income) ratio to determine if she qualifies based on her income, we will not only take into account the new PITI but also the PITI for the departure house. This double-whammy will push the DTI ratio above allowable limits for most prospective homebuyers.

The DTI ratio is the result of dividing a borrower’s long term monthly obligations (PITI, car payment, child support, credit card payments, school loan payments, etc.) by her gross monthly income. The mortgage industry expects this ratio to be below 45 percent but, with compensating factors, may go as high as 50 percent.

In order to keep the DTI ratio down as low as possible while owning two homes, in years past, the borrower could simply state (backed up by a signed rental agreement from the proposed tenant or a rent survey demonstrating the value of fair market rent) that she was going to rent her departure home. We could then use the rental payment to offset all or at least part of the PITI of the departure house. In many cases, this calculation resulted in an acceptable DTI ratio and the borrower would get the approval for the new loan for the new home.

The rules have now changed. While it is still possible to use the proposed rent to offset the PITI of the departure home, the borrower must have the signed rental agreement, proof that she has received and cashed a check for the deposit (AND the check has cleared the tenant’s account) and an appraisal of the home to prove that the borrower has at least 30 percent equity in it. If these conditions are met, the underwriter will use 75 percent of the proposed rent to offset the PITI of the departure property. If the homebuyer is using an FHA loan to buy the new property, she only needs 25 percent equity in the departure property and can use 90 percent of the rent to offset the PITI.

The above conversation relates to overcoming the DTI ratio guidelines when buying a home before selling the current home. However, it is the cash required for the down payment and closing costs that is the biggest obstacle to homeownership. More often than not, borrowers will need the cash out of their present home in order to buy their next home. FHA is still the leader in offering great 30 year fixed financing with the lowest down payment possible. It is still possible to buy a home priced up to $756,000 with just 3.5 percent down and, remember, you do not have to be a first time homebuyer to qualify for an FHA loan.

This column is written every Saturday by Peter Boutell, Certified Mortgage Planner and a principal at Santa Cruz Home Finance. You may reach him at (831) 425-1250 of email him at Peter@SantaCruzHomeFinance.com.