Homeowners who want to buy a new home to move into are faced with the dilemma of qualifying for two or, possibly, three mortgages. it is not uncommon to receive a call from a homeowner who asks how they can buy another home without moving out and selling their present home [referred to as the departure home] first. After all, who wants to move twice: once into a rental so they can sell their present home, then again when they move out of their rental home and into their new home?
Buying a new home before selling your present home is like putting the cart before the horse. it is not the best way to buy your next home. it is difficult enough to qualify for one mortgage.
When you want to qualify for another mortgage so you can buy your next home, your purchasing power will be substantially diminished because you already have a mortgage. Coupling that with the fact that your new mortgage will require cash to cover the down payment and closing costs and the result is a financial challenge that most households cannot overcome.
One solution may be to offset the PITI [principal, interest, taxes and insurance] on your present home with rental income. while a PITI payment of $3,000 would seriously cut into a family’s purchasing power, that home rented for, say, $2,000 per month would reduce the negative impact of that house payment.
However, current mortgage guidelines do not allow rent to offset the PITI [for loan qualification] unless the current mortgage is less than 70 percent [75 percent for FHA loans] of the home’s value, which is to be determined by an appraisal of the departure home. furthermore, the homeowner would be required to have a signed one-year lease agreement [cannot be a relative] and the tenant’s deposit in the bank before rent will be considered as an offset. this requirement cannot be met if the homeowner is planning on selling the departure home as soon as he/she moves into the new home.
The other challenge is coming up with the cash for the down payment for the new home. if cash is not available, this could be accomplished by tapping a retirement account [often limited to a $50,000 loan unless a penalty is paid] or with a Home Equity Line of Credit [HELOC] on the departure home. with a mortgage and a HELOC on the departure home plus a mortgage on the new home, the homeowner must be able to qualify for all three mortgages and be willing and able to make payments on all three until the departure home is sold.
There is another solution, and that is to sell the current home and buy the new home concurrently. although this is possible and does happen from time to time, it is very difficult to coordinate. consider how difficult it is to just get a buyer and seller to agree and close a transaction. when you add another buyer and another seller into the mix things get complicated quickly.
Unless the homeowner is planning on keeping their departure property and leasing it out, the best route is to simply take the time to sell the current home, get the money in the bank, move into a rental and then find the next home. You will be in a much better bargaining position when selling and then again you will be much better off when you are qualifying for the new mortgage and then negotiating with the seller of the new home. there are few that would disagree that the best course of action would be to meet with a mortgage professional to explore the possibilities.
Peter Boutell is a local mortgage consultant. Send questions to Lending a Hand,’ 1535 Seabright Ave., Santa Cruz, CA 95062, or fax 425-1044. Email him at . Archived columns are available at peterboutell.com. Boutell has been writing his weekly column Lending a Hand’ since 1995.
