You’ve landed a new job — across the country — or your family is growing (again). Regardless, the plan is to put your existing home on the market and buy a new one. That means you’ll be paying the mortgage on your existing home (until you close on its sale) and, at the same time, you’ll be putting together earnest money and a down payment for a new home.
Depending on your savings habits and how long you’ve anticipated the move, money might get tight. Or you may not have owned your home long enough to have much equity to use in buying your new home.
It’s not an uncommon challenge. According to the Zillow Group Consumer Housing Trends Report, 64% of buyers in 2017 were repeat buyers, likely juggling both a home sale and purchase. Many homeowners opt for a sale and settlement contingency, but if that doesn’t seem like the right fit for you and your family, there are several options to help you navigate the situation.
Home Equity Loans
If you don’t have money for a down payment but do have a lot of equity in your current home, you could consider taking out a second mortgage to finance your down payment. There are two options to consider: a home equity line of credit (HELOC) or home equity loan.
Both options allow you to borrow against the equity in your home. The main difference is that with a HELOC, you’ll get a credit line that you can borrow against, similar to a credit card. With a home equity loan, you’ll get a lump sum of cash. For both you’ll be paying interest on the amount you borrow each month. Got a HELOC, the interest rate is usually variable, and a home equity loan typically has a fixed rate. The good news is that you can pay down a home equity loan as quickly as you’d like to lower monthly payments on the credit line.
If you’re considering taking out a home equity loan or HELOC, you’ll need to act very early in the process since lenders considering you for the loan on your new home will want to see that the money has been in your bank account for several months.
Low-Down Payment Loans
To qualify you, the lender will add your current mortgage payments to your monthly debt to determine your debt-to-income ratio (DTI). This ratio compares your monthly recurring payments to your gross monthly income. Most lenders want your DTI at no more than 43 percent.
If you qualify, there are several options. Conventional loans available from participating lenders and backed by Freddie Mac and Fannie Mae offer 3% down to qualified buyers. FHA-backed loans start at 3.5% down. Servicemembers can apply for VA loans, which require zero down. Or if you’re buying property in a rural area, you may qualify for a zero-down loan backed by the USDA.
There are also some specialized loan types that may be ideal for a sell-buy situation.
80-10-10 (Piggyback) Mortgage
A piggyback loan provides a first and second mortgage simultaneously, covering 80% of the home’s purchase price.
This loan type helps buyers avoid private mortgage insurance (PMI) while making a down payment of less than 20%. Piggyback loans are also advantageous when you sell: You can pay off the second mortgage with the proceeds from your sale and be left with a single, smaller first mortgage just as if you had made a larger down payment in the first place.
Here’s how they work. The first mortgage is for 80% of the home’s purchase price. A second loan, a home equity loan, is opened at the same time for 10% of the price. The borrower is then responsible for making a 10% down payment out of their own funds.
Some lenders will offer variations on the loan/payment ratios such as allowing a 15% second mortgage and a 5% down payment.
Another loan type to consider is a bridge loan. Bridge loans alleviate the need to make a contingent offer, but they can cost more in fees than a home equity loan.
Bridge loans are temporary loans that bridge the gap between the sales price of a new home and a buyer’s new mortgage. It is secured by the buyer’s existing home. The funds from the bridge loan are used as a down payment for the new home.
If you’re interested in a bridge loan, talk to a lender to find out their requirements. Some lenders that make conforming loans exclude the bridge loan payment for qualifying purposes. This means the borrower is qualified to buy the move-up home by adding together the existing loan payment, if any, on the buyer’s existing home to the new mortgage payment of the move-up home.
If the new home mortgage is a conforming loan, lenders may be able to accept a higher DTI by running the mortgage loan through an automated underwriting program. If the new home mortgage is a jumbo loan, most lenders will accept up to 50% DTI.
Fees and payment structures of bridge loans vary. For example, you might be able to skip making payments on the loan for the first few months. However, during that time interest will accrue and be due when the loan is paid upon sale of your existing home. In addition, there will be a loan origination fee, which can average about 1% of the loan amount.
Making Your Move
Selling your existing house and buying a new house at the same time is going to be stressful.
But take your time. Do your homework. And don’t feel overwhelmed: there are real estate pros, agents and lenders, to help you.
If you’re in a market where making a contingent offer is difficult, remember there are loan options to help you be a more competitive buyer and land the home of your dreams.