Timing is one of the tricky parts of buying a home. Having the money to buy a new home can depend on when you sell your current house. Buying and selling out of sync can make for complicated situations and even cause deals to fall through. The process of buying a new home and selling your current one is difficult enough without having to worry that you won’t be able to afford your perfect house because you don’t yet have a buyer for your existing home. The PorchLight Real Estate Group of Denver, Colorado, suggests some strategies you can use to buy before you sell.
Also known as wrap financing, this type of loan combines payments of your existing mortgage and the payments on your new home’s mortgage into one loan for an overlapping period of time, usually between six and 12 months. This gives homeowners the flexibility to buy a new home with plenty of time to find a buyer for their existing home. A bridge loan makes managing the payments for both loans simpler, but there are plenty of catches—enough that this type of loan is actually quite rare. In order to qualify, homeowners need to demonstrate they can afford to pay a double mortgage for a certain period of time. Homeowners generally need to have a combination of substantial home equity, excellent credit, and a high enough income level to qualify.
Home Equity Line of Credit
A home equity line of credit (or HELOC) enables you to borrow money against the equity in your current home, which sounds like a promising way to get the money to start paying for the next one. It doesn’t quite work that way, though. Home equity lines of credit can’t be approved on homes that are on the market, so you can’t apply for such a line of credit if your house is already listed to be sold. In order to use this method, you essentially have to qualify for three separate loans: your existing mortgage payment, your HELOC, and your new mortgage. Since the amount of debt you already have affects the loan terms you can receive on a new loan, this can be a difficult task unless you have truly stellar credit and income figures.
Borrow Money from Relatives
Generous family can be a great help in bridging the gap between an old home and a new one. Relatives who are willing to loan you the cash to buy your next home while waiting for your home to sell can be an option, as long as those relatives are willing to follow through with the correct paperwork. When you apply for your new mortgage, having a paper trail of where your money is coming from matters. Having a repayment plan for the family loan will form part of your debt-to-income calculation.
In some cases, relatives may make a gift of cash to make a down payment rather than a loan. It’s important to be aware that the rules for the way gifts can be used for down payments varies slightly from one type of loan to another. On an FHA loan, you can make up your entire down payment out of gift funds, but they must definitely be gifts, not loans, from family. On a traditional mortgage loan, if the down payment is 20 percent or less of the total amount, only 5 percent of the down payment can come from gift funds. If the down payment is more than 20 percent of the total value of the loan, the entire down payment can be made up of gift funds.
Borrow From Your 401(k)
If you have a 401(k), and if your employer allows it, you can borrow some of those funds to use as a down payment. This is simpler because you don’t have to be approved for an outside loan. You can also pay the funds back to your 401(k) as soon as you sell your existing home, so hopefully your retirement account won’t be short of that money for very long. If you explore this option, make sure you won’t trigger any IRS penalties that will become extra expenses. Also, be aware that the longer it takes you to repay the money to your 401(k), the less potential growth you will have in your retirement funds for that period.
Use a Personal Loan
Finally, you may be able to get a personal loan to cover the new house. Interest rates on personal loans tend to be around 15 percent, however. This is much higher than many mortgage interest rates. It generally lasts for a shorter time period, so it will probably need to be paid back much sooner than your mortgage. Finally, just as with a home equity loan, having the extra debt will influence the calculations for your new mortgage. Having a personal loan may make it more difficult to get the loan you really want: a mortgage with great terms.How to Buy a New Home Before Selling Your Current One by Karen Wachtel
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