Assuming there is no question of occupancy on the new home to be constructed, if you earn enough income to cover the PITI (principle, interest, taxes and insurance) on both homes, the answer is no. Even if you can’t cover both payments with debt ratios that meet program guidelines, you may still qualify. Before the mortgage crisis, the most flexible of construction lenders would ignore your current PITI, assuming in those boom times that you’d be able to sell your house. These days, the best case scenario is being able to use 75% of market rents to offset or partially offset the PITI on your current house (the 25% not counted being for vacancies and expenses). To use 75% of market rents though, the borrowers must prove at least 30% equity in their current house. This could be done through an appraisal, or possibly a BPO (Broker Price Opinion Letter). This is a variation of the FNMA (Fannie Mae) “buy and bail” rule, requiring the same proof of 30% equity in one’s current home when future rents are used to help someone trade up and qualify for a new home.
The rule was put in place to help insure that borrowers didn’t buy a new home and bail on the one where they may have been “upside down”. Since most banks underwrite to FNMA guidelines, even though the end loans are not go to end up at FNMA, this “build and bail” rule is pretty standard in today’s post mortgage meltdown era. In its most restrictive form, it can also be applied to someone’s current rental properties which have little or no equity, even when these appear on tax returns showing stable rental income. Fortunately there are still construction lenders who will use actual tax return income or losses on existing rental properties, therefore not requiring a construction loan borrower to carry the PITI on all their properties.