Want to Buy a Home Before Selling Your Current One?

10 Jun

Want to Buy a Home Before Selling Your Current One?

Want to Buy a New Home Before You Sell Your Current One?  Here’s What You Need to Know
By Doug Goelz, Mortgage Services

In this vigorous Bay Area market, many homeowners who want to “move up” and buy a new
home are reluctant to sell their current home before buying their next home. The prospect of
two mortgages is less daunting to many homeowners than the idea of having sold a home and
not being able to get into contract on a new one.  If you’re thinking of “buying before you sell,”
here are several things you need to know:

1) You need enough cash for the down payment on the new home.  This often is the
biggest hindrance to buyers who want to buy a new home before selling their current
home.  If you finance the new home, you will need the down payment required for
financing on the new home.  Given that the new home in a “move up” situation in the
Bay Area is frequently over $1,000,000, you probably will need at least $200,000 (and
possibly much more) when you buy the new home.

Keep in mind that short term sources of cash for the down payment can include a 401(k)
loan, a loan against securities you already own, and/or a using a home equity line of credit
you already have in place on the current home.  If you are borrowing against your 401(k) or
securities, the new lender does not count the monthly payment on these types of loans as
part of your debt‐to‐income ratio. After you have bought the new home and sold the
current home, typically you would pay off the 401(k) loan and securities loan; a line of credit
on the existing home is paid off as a requirement of the sale of the home.

2) You need to document enough income to support PITI (principal, interest, property
taxes, and insurance) on both homes at the time you get the mortgage.  Even if you
intend to sell one home as soon as you buy the other, as long as you own both homes,
you have to show enough income to support PITI for both.

Lenders will count 75% of the rent on your existing home (referred to by lenders as “the
departing residence”) when calculating your qualifying income for the loan on the new
home.  To document the rent, you will need to provide a signed lease and a deposited check
from the new tenant for the move‐in amount (e.g., first month’s rent + security deposit).
Having the new lease and deposited check can be problematic since you need these items
before you have moved out of the current home and into the new one.  You will need a
flexible tenant willing to sign a lease, give you the deposit, but then be willing to wait until
you move out before they can move in.  Nevertheless, rent on the departing residence is a
good way to add to your income to qualify for the new loan.

3) If you are in a position to have enough money to pay cash for the new home, but not
enough income to qualify for a loan to finance the new home (a situation that is not
that uncommon in the Bay Area; one of the great paradoxes in the mortgage
business), you can buy the new home with cash and then finance the new home once
you sell your current home (and pay off the current mortgage).

The only reason that this is noteworthy is that lenders used to require borrowers to have
been on title for at least 6 months (and sometimes more) before they would lend on the
new home. Rules have changed so that new homeowners can immediately finance a home
they paid cash for.

4) Many potential buyers look for “bridge loans” as a means of buying before they sell
their current home. Bridge Loans are generally short term loans on your current home
that will give you the cash you need for the down payment on your new home.

Bridge loans are not a standard product offered by conventional lenders.  Instead,
conventional lenders offer Home Equity loans and lines of credit against the equity in a home,
but these loans are not intended to be short term loans.  Private lenders (also known as “hard
money” lenders) may offer bridge loans, but they will have much higher interest rates than
conventional loans, and more importantly, high up‐front costs (“points”).  As an example, a
bridge loan for $200,000 might cost 3 or 4 points.  That is, borrowers pay 3% to 4% of the loan
amount ($6000 or $8000) on top of other closing costs.  In addition, the monthly payment on
the bridge loan is included in the debt‐to‐income ratio when applying for the new loan, so the
borrower’s income must be high enough to support PITI on the current home, PITI on the new
home, and the payment on the bridge loan. In my experience, bridge loans are generally
unavailable or impractical for buyers.

If you are thinking of moving up and buying another home before you sell your current one, you
should have a step‐by‐step financial plan that allows you to have the cash and income you need
to buy the new home, and then subsequent steps once the current home is sold so that your
long term financing and debt is optimal for you.

Questions?  Feel free to get in touch with me at 415‐730‐4665 or doug@emortgageservices.net