Buying a first home is hardly easy, but it pales in comparison to buying your next home. Usually, two transactions are involved: the purchase of the new home and the sale of your current home. In other words, double the complexity.
Most homeowners would rather know where they’re going to live next before they let go of their current home, particularly if they have small children. However, stringent lender qualifying requirements make it impossible for most buyers to buy before selling.
Lenders require enough cash for a down payment and closing costs without having your home sold. You will also need enough income to qualify carrying both homes. If you don’t have enough income to qualify but it makes sense financially for you to keep your home as a rental property, the lender will use a portion of the rental income to help you qualify for the mortgage you need to buy the next home.
HOUSE HUNTING TIP: Buyers wedded to 30-year fixed-rate financing can make qualifying easier by changing to an adjustable-rate mortgage (ARM). There are ARMs that are fixed for a number of years — say five, seven or 10 — before they convert to an adjustable. These loans are available at much lower interest rates than 30-year fixed-rate financing.
If you plan to stay in the new home for longer than 10 years and want to take advantage of today’s low fixed interest rates, you can refinance after your current home is sold. If you take this route, make sure there isn’t a prepayment on the fixed ARM. Also, be aware that the interest rate on a 30-year fixed-rate refinance loan is a bit higher than it would be on an equivalent purchase-money mortgage.
In one instance recently, buyers were able to buy before selling, but only with the help of creative financing. The buyers had a generous down payment and applied for a jumbo conforming loan in the amount of $625,500. They hadn’t sold their current home, so that mortgage was taken into account for qualification. Their overall debt-to-income ratio was too high. The lender of the mortgage for the new home would qualify the buyers for a conforming loan only in the amount of $417,000.
These buyers were able to arrange a short-term interim loan from friends to bridge the gap until the sale of their current home closed. Check with your loan agent or mortgage broker to make sure this will be satisfactory with the lender. All cash for the down payment needs to be carefully documented, and certain restrictions apply.
Another buyer who couldn’t qualify to buy a new home without selling first was able to secure a private loan. Expect to pay a higher interest rate for such a loan, but you shouldn’t have to pay it for long if you’re selling a well-located home in good condition and you price it right for the market.
In some cases, parents are willing and able to provide bridge financing, and are happy to make more interest than they will on CDs or Treasurys.
In some markets that have a surplus of homes for sale, you may be able to buy contingent on the sale of your current home. However, banks selling foreclosure properties (REOs) usually won’t accept a contingent-sale offer. Neither will sellers in desirable, low-inventory areas where there is plenty of buyer demand and buyers with a lot of cash who don’t need to sell first.
In this situation, you will need to sell first to be competitive and have a chance of buying in a choice neighborhood. It could require making a move to an interim rental.
THE CLOSING: Although not popular, at least you buy time to find the right house that will suit your long-term needs.
Dian Hymer, a real estate broker with more than 30 years’ experience, is a nationally syndicated real estate columnist and author of "House Hunting: The Take-Along Workbook for Home Buyers" and "Starting Out, The Complete Home Buyer’s Guide."
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