Selling your home while buying a new one
Buying and selling a home at the same time is a daunting task. Add a slowing housing market to the equation and the experience has nightmare potential. Your dream home may be more affordable, but unloading your current one may be harder.
In a perfect world, you would coordinate the closings for both properties on the same day, providing a seamless transition from your old home to the new one. But the real world tends to be messier than that. While taking out another mortgage remains an option, shouldering two mortgages is harder now than it used to be, says Pete Bonnikson, senior vice president at E-Loan, an online lender. Not only is it harder to get approved for a second mortgage, he says, but your home may take six or more months to sell.
Here are some coping strategies to help ease the transition.
If you sell your home first …
The fear of selling your home before you've purchased a new one is obvious: You're homeless. But experts agree that this scenario is more attractive than the alternative, which is to buy a new home before your current one has sold (more on that below). The advantage is that you have the cash to buy your new house. In the meantime, however, you might be considering moving into your moving boxes. Some better alternatives:
1. Rent your house
In many short-term situations, the new homeowners will allow you to rent back your old home provided you cover their costs — particularly if you've already signed a contract to purchase another home. The process: Draw up a contract that includes a provision allowing you to stay put for a set period of time — say, 30 days. In exchange, you agree to pay the price of the new mortgage, property taxes, utilities and homeowners insurance. Keep in mind, this may be a whole lot more expensive than what you're used to. Assuming your home has appreciated nicely in value, the new owner's expenses are probably much higher than yours were.
2. Move in with loved ones
If you need more than a month — which is likely in today's market — you might need to move out of your old home and in with parents, a sibling or a friend. If that's not an option, consider a temporary apartment or the local Best Western. If you're forced to go this route, remember you'll have to pay movers twice and put your stuff into storage, all of which can cost a pretty penny. On the positive side, chances are your mom will be thrilled to have you back home.
If you buy your new home first …
No one relishes the idea of owning two primary residences and doubling up on costs. In fact, it even makes the mortgage companies uneasy, which is why you'll need to qualify for both loans, says Holden Lewis, a mortgage expert with Bankrate.com. If you don't qualify, you'll have to sell your old home first.
Lenders are somewhat sympathetic to folks in this situation and often loosen up their traditional standards a bit. While a typical mortgage carries a 40% debt-to-income ratio, a lender may allow a 50% to 55% debt-to-income ratio for someone temporarily straddling two mortgages, says Mark Lefanowicz, CEO and president of E-Loan. Keep in mind, though, that lenders are more cautious today. Before a lender approves you for a second mortgage, he or she will take a close look at your credit score (which must be at least 680), your job and the amount of savings that you're left with after your down payment, Bonnikson says.
Provided you can qualify, here are ways to help you come up with the down payment on the new home before you have the proceeds from the old one.
1. Tap your home equity
The cheapest way to come up with a down payment for your new home is to borrow money via a home-equity line of credit. Depending on your credit score, your interest rate should be anywhere from half a point to one percentage point above the prime rate. Even better, the interest is tax-deductible up to $100,000. Once you sell the home, you simply pay off the loan.
Keep in mind that this is something you need to line up well before you put your home on the market. Once it's clear you're aiming to sell, no bank will give you a line of credit, warns Keith Gumbinger of HSH Associates, a Pompton Plains, N.J.-based financial publisher of mortgage information. That's because, given the low fees, lenders don't make any money when they're paid off quickly.
2. Consider a bridge loan
If you can't tap the equity in your home, you could take out a bridge loan, also known as gap financing. It allows you to borrow money for a down payment on the new home based on the amount of equity you have in your first house. The trouble with bridge loans is that they're not widely available — at least for now — and that they're expensive, warns E-Loan's Bonnikson. "This is a fairly risky way of financing, especially now," he says. The interest rate is often at least one to two percentage points above the prime rate, he says, and there are a whole host of fees, including an origination fee of more than 1% and other closing costs.
You may, however, be able to avoid some of those fees if you get the bridge loan from the same bank that is underwriting the mortgage for the new home, says Tony Meola, executive vice president of mortgage banking production for Washington Mutual.
3. Borrow from your 401(k)
If you need only a little bit of money for a down payment, or want to supplement a home-equity line of credit, you could borrow from your 401(k). Most employers allow workers to borrow either 50% of their vested balance or $50,000, whichever is less. You then have the next five to 10 years, depending on your company's rules, to repay the loan plus interest (which you pay into your account), which typically runs one to two percentage points above the prime rate.
But be warned: If you leave your job for any reason, you'll have to return the money immediately or pay the taxes and a 10% penalty. And since this is your nest egg, we would recommend paying off the loan as soon as you get the proceeds from your first home's sale.
Some of this is terrible advice! Do NOT tap into your 401(k)! You can purchase your home with a "Sale of Seller's Home" Contingency. That basically says, "Our home is under contract but hasn't settled yet. We will buy this new home but only contingent upon our old home going to settlement." In this market, it is no problem getting the sellers of the new home to agree to such a contingency. Any good real estate agent can get that accepted. It's an even easier sell now that the new HUD rules are in place, which have had the effect of causing settlements to take longer. Gone are the days of 7-day turnarounds. Now you are looking at four weeks minimum. Bridge loans can be expensive and usually are not necessary. And many people have lost their homes "tapping into their equity." The best way to tap into your equity (if you are among the lucky few who still have equity) is to sell the home, take the equity in cash and reinvest it again in a new home or other real estate that is either non-taxable or tax-deferred. 100% loans are still available through VA, if you were or are in the military.
Exit Real Estate Professionals