Peter Park Peter Park Apr 06, 2023

SVP, National Sales Manager-Mortgage Banking

 

Thinking of making a move? You’re not alone. The last few years have seen many Americans choose to swap their current home for a new one for a number of reasons – a growing family, trading down, job transfer, remote work, falling in love with a neighborhood, wanting to be closer to schools or town or family. Whatever your motivation, it’s exciting to imagine yourself in a new place. But getting there takes time and planning. Because when you already hold one mortgage, there’s a lot to consider when getting a second loan or securing alternate financing for a new home.

With the right upfront research and a bit of luck, you may be able to smoothly transition from your old mortgage to the new one with little gaps or overlap. However, as the well-known idiom goes, hope for the best but prepare for the worst. This article will help you do just that by explaining what to expect when trying to qualify for a new home’s mortgage before you sell your current house, as well as alternative solutions.

While the record-breaking real estate market brought on by the pandemic has softened some, it’s still moving quickly – so you need to be ready to jump.

Preliminary Step - Get Real About Your Finances

Know what you can realistically afford and whether you could handle the risk of paying two mortgages. 
Selling. Buying. Moving. These are all stressful, but, by the end of the process, your new home will make it all worthwhile. But do yourself a favor and get as organized and buttoned up financially as you can to reduce stress, avoid complications and look more attractive to lenders. Because when you find “it” – the home you just have to have – you don’t want to miss out.

Financial factors to take into consideration when getting pre-approved for a new mortgage prior to selling your old house:      

  • Your overall financial health: credit score, income, and assets
  • Your current mortgage amount and what percent of your budget it occupies
  • Your home’s payoff amount
  • What you can expect to make from your house sale (don’t forget to factor in commissions, closing costs, etc.)
  • What type of home and mortgage you can afford
  • Your access to cash, savings or investments (that you can liquefy) to cover the new down payment and closing costs
    • A down payment today can run 3% to 20% of the purchase price of a new home, with closing costs another 2% to 5% of the purchase price.
  • Your debt-to-income ratio (DTI) – This is all your monthly debt payments divided by your gross monthly income, and how lenders measure your ability to repay the money you want to borrow. Many have different DTI requirements.
    • Generally, a DTI of 36%, but not more than 43%, is preferred.
    • Even if you do have a higher ratio, you can still get a loan but it will come with higher interest rates – increasing your monthly nut.

Need help figuring out what your mortgage payment could be? Check out Bank of Hope’s Mortgage Calculator.

Financial questions to answer if getting your mortgage before selling your old house:

  • How many months could you handle paying off two mortgages (and two sets of utilities), in the scenario that your old house doesn’t quickly sell?
  • Related to the above, how quickly are houses selling in your area?
  • How much of a discount are you willing to give in order to expedite the sale?
  • How much money would you have set aside to cover your new mortgage’s closing costs and similar fees?
  • Based on your home’s current condition, how much money do you anticipate needing to set aside to cover repairs requested by the buyer?

Diving deeper into these individual answers can influence how much money you put toward your new mortgage and how much you set aside to cover your old house’s loan payments and expenses. It can also shape your asking price—if you don’t think you can sustain two mortgage payments for a prolonged period, you can talk with your realtor about lowering the initial price so it’s particularly appealing to buyers.

Different Strategies for Timing Your Old and New Mortgages

Sell Your Old Home Before Getting a New House & Mortgage

Selling your old home prior to acquiring a new mortgage may make the loan application process easier and will help you avoid scenarios during which you pay two mortgages at once. However, it’s not entirely without its inconvenience or risks.

Pros of selling your house prior to acquiring a new mortgage:

  • You can use the sale proceeds to buy the next house or make a larger down payment. Relatedly, the mortgage process itself will be much more straightforward than other scenarios we’ll outline below.
  • You have a clearer understanding of your finances rather than having to estimate the profits of your previous property’s sale.
  • You lessen the financial pressure to get a new home ASAP, instead having the flexibility to house hunt on your own schedule and choose a move-in date that works for you.

Cons of selling your house prior to acquiring a new mortgage:

  • Selling first might necessitate needing temporary housing – rental, vacation home, hotel, stay with friends or relatives (more challenging with kids and pets), putting things in storage, and moving twice (and paying twice).
  • Having to wait for a buyer means you could lose out on a house you love or end up accepting a lower offer just to get yours sold.

When is this the best scenario: Selling your house prior to acquiring a new house and mortgage makes sense when there are ample properties for sale, making it a buyer’s market. During such situations, the homes tend to sit on the market for longer, making it harder to predict how long it will take to close. On the flip side, once you have the assurance that comes with having sold your home, you should be able to swiftly find your ideal home and acquire the new mortgage, meaning that you won’t need to be “un-housed” for very long.

Get Your Next Mortgage and Home Prior to Selling Your Last Property

Maybe you’re just ready to move. Or you have to start a job in a new town by a certain date. Could be you’ve found that once-in-a-lifetime home and just have to act on it. Getting a new mortgage prior to selling your house can simplify processes like moving, as well as eliminate all pressure to find a home ASAP (in order to avoid living out of a hotel for a prolonged period). However, this situation only works if you have the financial means to potentially cover two mortgages at once.

Pros of selling your house after acquiring a new mortgage:

  • You will only have to move one time and on your schedule.
  • You could move and rent out your current home, market it as a yearly rental or vacation home (via Airbnb, VRBO or another platform), or set up a rent-to-own agreement.
  • Cons of selling your house after acquiring a new mortgage: Your existing mortgage could make your DTI higher, resulting in a lower available loan balance for the new house and higher interest rates. Some lenders might not even want to lend to you at all.
  • You might end up carrying two mortgages until, or unless, the first house is paid off.
  • You don’t have the certainty of knowing the exact profits of your old house’s sale, as the final price might be lower or the cost of the needed fixes may be higher than you anticipated.

When is this the best scenario: Acquiring a new mortgage prior to selling your house and paying off your old loan is contingent upon having a sizable amount of cash on hand to cover the possible expenses referenced above. It’s also advisable when confronting a seller’s market, such as the one in 2020 and 2021. During this time, buyers often faced multiple bids for the same house (many over the asking price), making it much more difficult to buy a home. Buying a property before selling your previous one ensures that you won’t face the nightmare of being without a house, entirely.

An important note about mortgage recasting:

Mortgage recasting is common for individuals who choose to take on a new house and mortgage prior to selling their old one. Once they sell, they can use the profits to make a large, lump-sum payment toward their mortgage principal. The lender will then do a loan recasting or re-amortization that will lower the monthly payment, since they’ve now reduced the principal. However, the interest rate and term will remain the same. While mortgage recasting doesn’t often cost that much to set up (think of what you will save overall), not every lender offers this option.

Sell and Buy at the Same Time

Buying and selling a house at the same time is the dream. During the pandemic, there were many stories of people buying/selling in a matter of weeks, or less. Other times, though, all the planning and wishing in the world can’t make the transition happen smoothly, and you may find yourself unexpectedly facing one of the above scenarios. 

While the goal is to close on both houses on the same day, or within days, there are things you can do to protect yourself from the ebb and flow of the real estate market.

Make a Contingency Offer:  Found your dream home and have to sell your current home to finance it? The good news is, once your offer is accepted, you can put this reality in writing as a contingency clause (signed by both parties) to the sale and purchase agreement.

Pros of contingency offers:    

  • They give banks added reassurance as they don’t like buyers to take on more mortgages than they can afford.
  • You do not need to come up with the down payment or closing costs until your current home sells.

Cons of contingency offers:

  • You can often lose out in this scenario, as home sellers would rather avoid contingency offers – especially when other buyers are ready with all-cash offers, over-asking-price offers, or just uncomplicated offers.
  • Through an agreed upon “kick out” clause, a seller can accept a ready-to-go (non-contingent) buyer’s offer. You can then opt to remove the contingency from the contract and go ahead and close the deal, or walk away.

Agree to a Rent or Lease-back Agreement: If timing is an issue, this option could really help both the buyer and seller out. Take note, these agreements are usually short, around 30 days, and are paid in a lump sum.

  • As a seller, sometimes you cannot get into the new house when you need to (and don’t want to make a temporary move), or you just need more time to move. This allows you to rent “back” your sold home from the new owner.
  • As a buyer, this could earn you some extra cash for the new mortgage. As well, if your current house hasn’t sold, allowing existing occupants to stay on gives you more time to close out things on your end.

Financing Options for Purchasing a New Home

Before you enter into any financial agreement, be sure you have found the right loan for you. One where you trust the lender, feel confident you can make the monthly payment, and the timeframe for loan repayment works for your future planning. In today’s market, there are several loan options for funding a new home purchase.

1. Second Mortgage:
Your current home can be a great resource when figuring out how to afford a new home. Here are two ways to tap the accrued equity and leverage its value. Both give you access to the funds you need for a down payment and closing costs, while waiting for your current home to sell.

  • Home Equity Loans: You get a lump sum loan and make fixed monthly payments until the loan is paid off. Terms range from five to 20 years, but can go as high as 30 years.
  • Home Equity Line of Credit (HELOC): This loan comes with an adjustable interest rate, and you can use it as a credit card or to write a check, as needed, up to your credit limit. You make monthly payments on the debt amount.

2. Bridge Loan: Just as it sounds, this temporary loan covers the gap between buying your new home and selling your current one. It helps avoid having to make a contingency offer and gives you the money for the down payment and closing costs. Payments won’t start until after you sell your current home, and you can pay off the loan with the proceeds if you choose.

3. Low Down Payment Loan: Several federal government programs offer low down payments to qualified buyers that could be easier on your budget. Many are designed to help first time buyers, but can also be used for second home purchases.

  • FHA Loans : This government-backed mortgage is insured by the Federal Housing Administration and requires both a lower minimum credit score and down payment than many conventional loans. You could qualify for a down payment of just 3.5%.
  • VA Loans : If you are a veteran, eligible active duty member, reservist, National Guard personnel or a qualifying surviving spouse, you might qualify for a VA loan that requires no down payment at all. Backed by the Department of Veterans Affairs.
  • USDA Loans : Another zero-down option is available in rural areas around the U.S. This competitively priced home loan is backed by the U.S. Department of Agriculture.

Additional Tips for Buying a Home

Research the Current Market

The more you know the better you can plan ahead

Selling a home is such a personal journey. You know your home's emotional value to you, but getting a firm grasp on its market value is all important. If you want a smoother selling/buying process, it’s beneficial to be as up to date on the market as possible and aware of all your financing options.

Do upfront research into what’s available: Whether you’ve found that next dream home or not, take some time to see what’s happening where you live now and where you want to buy next. A realtor’s experience can be invaluable here, but you can also do the legwork yourself.

Don’t go with the first lender you find: When you’re ready, compare mortgage lenders and shop around for the loan that’s right for you. See what your options are and get several quotes, and keep in mind that you don’t have to use the same lender that holds your current mortgage. Options include banks, credit unions, online lenders or mortgage brokers.

Figure Out Your Ideal Timing    
While you might have the best master plan in mind for selling your home and then buying, life has a way of mixing things up. So while you might want to be in a new home to enjoy the summer, or by the fall so kids can be situated to start school, be prepared to have your timing pushed back. From getting your house market-ready to listing it and going through showings and open homes (plus added time for accepting offers and then closings) the full process       can be several weeks or longer. You also need to factor in time to find, bid on and secure your new home – and move! While spring and summer are typically great times for buying and selling homes for maximum value, holding off to the fall might make more sense for your schedule.

Market Watch
As of January 2023,
homes spent an average of
75 days on the market.
Source: Fred Economic Data

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