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Ideally, you would sell your current home and buy your new home on the same day, moving from one mortgage to the next. While this seamless transition has worked out for some repeat homebuyers, others have managed to sell their homes and rent them back until they find a new home to buy.
But if neither of these timing options works for you, you'll need to secure a financing option that lets you buy your next home before you've sold your existing home. (Bing: How low are interest rates this week?)
Here are five financing avenues to explore that may help you in the move-up-homebuyer process.
No. 1: Bridge loan or wrap financing. "Bridge loans have not quite gone the way of the dodo, but they are extremely rare," says Scott Davis, branch manager of Homestead Funding in Fairfax, Va.
Jon Bass, executive vice president and director of marketing and advertising for BB&T in Greensboro, N.C., says that homeowners need substantial home equity and excellent credit and income to qualify for a bridge loan.
Bass says a bridge loan, which wraps your payments for your current home and your next home into one loan, typically lasts for six months and up to a maximum of 12 months. Rates for these interest-only loans range between 6.5% and 8%, with a maximum debt-to-income ratio of 40%, Bass says.
However, Bass says BB&T calculates your debt-to-income ratio based on a payment of 1% of the loan amount just in case it takes longer to transition to a permanent loan. For example, if the combined value of your current home and your new home is $300,000, your ratio would be calculated based on a payment of $3,000, even though the monthly payment on a 6.5% interest-only loan would only be $1,625.
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"Your bridge loan can only be up to 80% of the combined value of both the homes you're using as collateral," Bass says.
Borrowers must pay bridge-loan closing costs, including a loan-origination fee of 0.5% to 1%, and then pay closing costs for the mortgage on their next home.
No. 2: Home-equity line of credit or cash-out refinance. Tim Ross, president and CEO of Ross Mortgage in Royal Oak, Mich., says that a home-equity line of credit can only be approved for a home that's not on the market. He says most lenders offer home-equity lines of credit of up to 80% of your home value.
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"If you wanted to use a home equity line of credit for a down payment on your next home, you would have to qualify for all three loan payments: your current loan, your home-equity loan and your next mortgage," Ross says.
Michael Jablonski, executive vice president and retail production manager for BB&T Mortgage in Wilson, N.C., says a cash-out refinance is also an option, but he doesn't recommend it because the upfront closing costs and fees are expensive.
"You always have to realize that borrowing money will impact your next transaction," Jablonski says. "You'll have to qualify for your next mortgage as well as the payments on the cash-out refinance."
No. 3: Borrow from relatives. If you have relatives willing to provide you with cash to make the transition from one home to another, that can be a good solution to your move-up dilemma as long as they are also willing to provide the appropriate paperwork.
"You have to paper-trail everything now for a loan, so you would have to show where the money comes from," Davis says. If the money is a loan, you'd have to document a payment plan as part of your debt-to-income ratio.
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Ross says you can use gift funds for your entire Federal Housing Adminstration down payment, but your relatives must provide the funds as a gift rather than a loan.
The rules for down payment gifts on a conventional loan are slightly more complicated. If your down payment is 20% or less, only 5% can come from gift funds, but if your down payment is above 20%, the entire amount can be a gift.
No. 4: Borrow from your 401(k). "If your company allows it, it may be worth exploring the option of borrowing from your 401(k) because you can repay yourself when you sell your home," Jablonski says. "Make sure you know your employer's rules and that you are not incurring any IRS penalties."
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Most 401(k) plans allow you to borrow up to $50,000 or 50% of your vested balance, whichever is smaller.
No. 5: Take out a personal loan. Davis says homeowners without enough equity or enough available funds in a 401(k) may qualify for an unsecured personal loan. However, he says the interest rate on these loans is typically around 15%, and the loans usually last for just a few years. In addition, the borrower would have to include payments on that loan when qualifying for a mortgage on the next home.
How about renting out your old house?
Thats what i did, seems to be working out so far.
is this some of the same thing that got us in trouble the last time.
we are about to purchase our secend home while still paying on the first, but we are getting out of a bad neighborhood, and the first home is almost paid off, and we can afford both payments. sometimes the safety of the family has to come before the math. we will sell the house it's just a matter of price, and we are willing to go pretty low
Borrow from relatives? Terrible advice. A personal loan? Good luck with that!
Not good advice. I am a retired Loan Officer. I was in the credit field for 41 years. This article should be considered rubbish!
At the risk of sounding redundant, this is the dumbest, most irresponsible article I've seen on here yet. When you're still paying on a house, you're already in debt...so now we advise people to get further in debt by attempting to manage 2 mortgages?? The housing market is just now starting to recover, at least in our area, and we don't need that mess to start all over again. If work, school, marriage, or growing family makes it necessary to buy another home before your current one sells, use a contingency clause in your new contract. And if you can't afford the down payment, you are not prepared to buy a home. If family can afford to gift it, it's one thing, but to borrow money so you can borrow more money is just asking for trouble. And I agree with jhay49. I bought based on location. I bought a fixer at the top of my budget in a high demand area where my home would sell in a heartbeat. I used cash from selling family owned land instead of taking out a mortgage, and didn't buy more home than my family needed. Not everyone can do that, and a mortgage would be needed, but trying to carry 2 mortgages could end up costing you both homes. It just isn't smart. And the best advice I've heard from anyone: spend 10 - 20% less than what the lender says you can afford.
1. Sell house 1, rent apartment (if you can't live with friends/relative) until you can buy house 2.
2. Finish paying for house 1 with your own money, sell, buy house 2 whenever wherever you want.
I'm taking option 2. I will be done paying for my house 1 in 4 more years when I turn 44. After that I'll be free from debt with a big junk of money called "I paid off my house!"