Financing Your New Home Before Selling The Old Home
You just found your dream home and you know it won’t stay on the market long. Or you accepted a job offer in a new state and needed to buy quickly.
There’s just one catch. You’ve already got a home with a mortgage.
Ideally, you’d sell your current home overnight, but even the most optimistic real estate agent will warn you that’s an unrealistic goal. Therefore, you’ll find yourself facing a surprisingly common dilemma: paying the mortgage, utilities, and taxes for your current home until its sold. At the same time, you need to gather funds for deposits and down payment on your new home
Depending on your savings habits and how long you’ve anticipated the move, money might get tight. Or you may not have owned your home long enough to have much equity to use in buying your new home.
You’re not alone. The National Association of Realtors reported that 64% of repeat buyers used savings from a previous home to finance their new purchase. Most likely quite a few were caught between selling one home while purchasing another.
When you have significant savings, you can of course dip into your own funds to finance the purchase. However, financial advisors warn that you can incur a large capital gains tax bill, which may turn out to be much more than the interest you’d pay on a loan. You’ll probably need to work with a professional planner to run the numbers.
Getting A Loan To Tide You Over
It’s a good idea to review all your options before you apply for a loan. You might consider interviewing more than one mortgage broker as well, as some are more creative than others.
For instance, Cordelia bought her new home after she retired. When the buyer of her old home couldn’t get financing, she needed to qualify for handling two mortgages…and her income had just taken a nosedive. Two lenders balked; the third knew about a legal way for her to count retirement distributions as income.
You have to investigate your loan possibilities in the very early stages. Once you place your former home on the market, your options will be sharply reduced. You can’t get a home equity loan against a property that’s been listed for sale.
New Mortgage With Low Down Payment
To avoid paying mortgage insurance, reduce monthly loan payments, and appeal to mortgage brokers, buyers are encouraged to come up with a down payment of 20% or more of the home price. However, if your assets are tied up in your current home or you have good reasons not to sell off an investment account, you may decide to go ahead and absorb the extra cost.
Requirements for these low-down-payment loans have become quite strict, especially when you’re putting down less than 10%. You’ll need to show a history of income and a good credit score. Your options vary depending on your credit history and employment; for instance, if you’re buying in a rural area or you’re a military veteran, you could be eligible for a 0% down payment.
A low down payment will get you into a new home quickly. But you’ll have higher monthly payments that can affect your cash flow. If your former home fails to sell for six months or more, it’s easy to get into a financial bind. Therefore you might want to consider another option.
Home Equity Loan (HELOC)
Suppose you’ve got quite a bit of equity in your current home, but you don’t have significant savings or realize it’s not a good time to cash out your investment portfolio.
To calculate your equity, begin with your home’s market value and subtract the amount you owe on your mortgage. The difference is your home equity. Typically you can borrow up to 85% of your equity.
You can do this in two ways. A HELOC (Home Equity Line of Credit) gives you a credit line that you can borrow against, similar to a credit card. You’re only charged interest on the amount you actually borrow and use.
With a home equity loan, you get a lump sum of cash all at once. Your interest rate and payment schedule will be fixed, indefinitely.
In both cases, you need to begin very early in the process. Your lender will want to review your finances for the past several months. You need to lock the loan in place before putting your home on the market.
Most important, you need to be very realistic about your ability to repay your loan. Your home is your collateral. If you can’t meet the conditions set by your lender, you could lose the property. That won’t happen overnight, but it’s a real possibility.
You might want to consider piggybacking your new loan on top of the old. The concept is pretty straightforward. You take out the usual mortgage for 80% of your new home’s value. Simultaneously, you borrow against your current home’s value to make up whatever you need to come up with a 20% down payment.
Now you can avoid private mortgage insurance. If you need a long time to sell your home, you could come out ahead: the monthly PMI will add up to more than the interest associated with your second mortgage.
When you sell your home, you pay off the second mortgage with the equity that becomes available. Now you have just one loan for 80% of the home’s value.
Bridge Loans (also known as swing loans)
Bridge loans are designed to make up for short-term cash flow needs. Essentially, you borrow funds against your current home to obtain a down payment for your new home.
For these loans, you need to shop around, as requirements, fees and payment structures will vary. Some will allow you to postpone payments for the first few months; however, you still owe interest and payment will be due when you sell your current home. You may also face loan origination fees, typically 1% of the amount of your loan.
Choosing the best loan for your needs
For most people, simply applying for a home mortgage can be stressful. Add in the pressure of selling your existing home and it’s easy to feel overwhelmed.
The truth is, thousands of homeowners go through this process every year. You can too.
You’re most likely to enjoy a positive experience when you do the research yourself. Take advantage of financial planners and mortgage professionals, but gather your own information.
Some mortgage professionals favor one type of financing so they won’t make you aware of other options. Your special circumstances (such as income shortfalls or low credit score) could disqualify you for certain programs or lower interest rates. Conversely, your affiliation with a bank or status as a veteran can open doors. It’s important to make actual calculations and comparisons based on your own situation.
And in most cases, within three to six months, your current home will be happily occupied by your buyers. You’ll be down to one mortgage and you’ll be living in the home of your dreams.