Plenty of new borrowers are buying a new home and selling their old home. With all the changes in the mortgage world, can this still be done? Sure it can – it just requires a game plan, and a good lender and real estate agent can help.
The homebuyer often needs the cash proceeds from the sale of the current home in order to qualify for the new mortgage on the new home. Each situation is different but selling first and then buying second would be ideal; however, this method probably involves moving into a temporary rental in the interim – and few people want that.
Bridge loans, once popular, would provide the home seller cash from an interim loan that would be used as the down payment of the new home. The interim loan is secured by the departure home and would be paid off as soon as the departure home was sold. This way, the homebuyer could conceivably buy their “move-up” home before selling their departure home. The trouble with this arrangement is that the homebuyer potentially now has three mortgages: one on the departure home (assuming it is not free and clear); one on the new home and one on the interim loan. Not many homebuyers can qualify for three mortgages unless they have excellent income and low mortgage payments. Even if the homebuyer could qualify and make all of the mortgage payments, what would happen if the departure home did not sell?
The good news is that it is possible to sell a house and buy a house at (almost) the same time but to get the timing right it takes cooperation from the people who are buying your home and the sellers of the home you are buying. Unless you could qualify for two mortgages (one on the current home plus one on the move-up home), this method would involve a contingent offer. Your offer to buy your next home would be contingent on your current home selling first. In this hot real estate market, however, it might be rare to find a seller willing to accept your offer – there may be other buyers without this in their contract.
What about turning the old house into a rental? Those homeowners with enough cash for a down payment on their next home frequently ask about keeping the departure home and using rental income to offset the PITI (principal, interest, taxes, and insurance). While this is a potentially good way to be able to make two mortgage payments affordable, Fannie Mae and Freddie Mac have established some strict restrictions. First of all, the departure house that is to be rented must have 30 percent equity (70% or lower LTV) or 25 percent if the new loan will be an FHA loan. The departure home must have a signed rental agreement with the prospective tenant and the tenant’s deposit money must also be in the hands of the homeowner. If all that is in place, the landlord will be allowed to use just 75 percent of the rent to offset the PITI.
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