This blog post was written by HUECU mortgage expert, Ryan Duckless
If you own a home but want to size up or size down you might be asking yourself, what are my options? Can’t I just use “the cash” in this home to purchase another one? As a current homeowner, you understand the costs associated with a real estate transaction from the first time around. Please read on to see some options in order to get into a new home.
1. Sell your current home to buy a new one: After discussing with your loan officer, it has been determined that you can support the one property and associated expenses alone and the funds needed for the down payment will need to come from the net proceeds of the sale. For the mortgage loan to qualify, you need to eliminate the debt obligations of your current property from your lending ratios. With this route, keep in mind when making offers, the selling party will have to agree and be comfortable to the terms laid out in your offer. The source of the funds will fully be disclosed to the seller and on the offer/purchase and sales agreement there will generally be a contingency on your current property to be under a sales contract by a certain date or the sellers/you can walk away from the deal. After all, your deposit could be at risk if you cannot get your current home under a sales contract by the set date, and this will protect you from a potential financial loss.
- Additional thoughts from Ryan on this: this route is possible, but be prepared for the stress that comes along with it.
Discuss your plan in great depth with your loan officer, agent and real estate attorney as there are several moving parts that will need to be catered to throughout the transaction. You and your team will have to juggle two real estate transactions at once and structure them meticulously so the funds will be available to use for the purchase of the new home. When it comes to financing, keep in mind the majority of the funds for your down payment will be from the net proceeds of the sale, but you will still need some liquid cash for your offer to purchase and earnest money deposit due at purchase and sales ($1,000 will be deposited in good faith at the offer, and usually 5% or another mutually agreed upon amount with the seller will be deposited at Purchase and Sales).
2. Buy a new home and sell your current home later: After discussing with your loan officer, you can be pre-approved to purchase the new home while retaining your current property. This means you as a borrower qualify to support both properties and have sufficient funds saved up needed for the transaction cost of the new one. Your pre-approval is not dependent on the sale of a property which in the eyes of the selling party is generally more favorable as they will not have their sale potentially held up while you sell your current home. As a homeowner, you might be aware that there are often time delays with real estate transaction. Once you close on the new home you sell your old one on your schedule.
- Additional thoughts from Ryan on this: if you are in the financial position to do so, this is the most straight forward and low stress way to purchase your new home. If you do not have the “cash” on hand, you may be able to use a loan or withdrawal from your retirement funds. Most loans from a secured liquid asset (such as a 401K) owned by the borrower do not use the monthly payment of the loan in your debt to income ratios. This is just a suggestion; always consult a tax professional before making a decision. Another overlooked pro is the low stress of moving from one home to another; you are able to move out and move in on your schedule which is one less thing to juggle and coordinate.
3. Using Bridge Loans and Second Mortgages: A secondary loan on your current property may provide with you the cash liquidity to buy your next property by accessing the available equity. Bridge loans are short-term loans in order to gain enough funds for your next purchase. Usually they have a term of under one year with a higher interest rate secured by the equity in your property. A second mortgage (Fixe Rate Loan or Home Equity Line of Credit) can provide access to the equity built into your home to use to cover expenses of purchasing a new one. These options also come with qualification requirements, as you will need to qualify for the monthly obligations of the two properties and the source of the lent funds in order for the mortgage to be approved. While drafting your plan keep in mind this loan will also have to be paid off from the net proceeds of your sale of the subject property, so factor in the outstanding balance from your bottom line.
- Additional thoughts from Ryan on this: most lenders will require at least 80% loan to value and will not approve a second mortgage on a property that is currently listed for sale. Take the estimated value of your property times 80% and minus your current mortgage balance to equal the available equity to borrower. Please check the terms of your second mortgage or ask your lender; oftentimes there will be a penalty if you close it out earlier than certain date. Also, not every lender has bridge loans or second mortgages available.
Whichever route you decide the most important thing is that you will need to plan and coordinate accordingly. This will be a multifaceted transaction and working with the right real estate agent, lender and attorney will make this process a lot more low stress on you. There will be so many items to juggle, and as long as you have a great team working with you, it will absolutely be possible; just remain focused and positive, and look forward to your new home!