When you list your home for sale and want to purchase a replacement home an important question arises. How to get a mortgage when selling a home?
Remember the mortgage application process you went through the last time you bought a home?
Your application required lots of paperwork and many deadlines to deal with. Selling your home to buy another home relives all the stress you went through back then.
How to Get a Mortgage when Selling a Home
This guide should help you with buying when selling your home.
Consider the Timing
Ideally, you would like to sell your home first and use the sales proceeds to buy your next home.
Unfortunately, this simple process rarely occurs. So, you must research the local real estate market where you sell and intend to buy. They should differ.
Too many sellers list their home at a high price and end up dropping the price many times before getting an offer. If you want a quick sale you need to list at a competitive sales price. Your Realtor helps you with these decisions depending on your timeline for moving.
Before buying, research the neighborhood you like to move to. This gets you ready to find a home once you sell your current home.
Also, talk to mortgage lenders about a loan for your new home. Make sure the lender knows you must sell your current home first.
When both selling and purchasing a home you must get the money from the sale of your home to finance your new home purchase.
You’ll need to add a “Sale and Purchase Contingency” in your new home purchase contract. This makes your purchase dependent upon selling your current home. Otherwise, without those funds, you can’t buy your new home. Talk with your Realtor about making a “Contingency Offer”.
Know that contingency offers do not appeal to sellers. Why wait for you to sell your home when another buyer may offer a straight up purchase with no strings attached other than getting a mortgage?
Contingency offers typically allow the seller to accept another buyer’s offer. But, a specific time allows you to remove your contingency like one or two days. If you can’t come up with the funds for the purchase the seller gets out of your purchase contract to sell to another buyer.
Then you must start all over, looking for your new home. A hot market makes contingency offers difficult. Sellers often get many offers during a hot market.
Also, houses “under contract” pending a contingency discourages other purchasers from making an offer to buy.
Sellers don’t like that, especially in a hot market.
You’re Mortgage Application
Once you accept a buyer’s offer to purchase your current home it’s time to look for a new mortgage. Obtain quotes from several lenders.
Qualifying for a new mortgage requires certain steps by your lender. This includes adding your present mortgage payments to your monthly debts determining your Debt to Income ratio (DTI). Your DTI balances your monthly payments with your gross monthly income. Many lenders require your DTI at 43 percent or less.
Also, you need to decide how large of a down payment you want to make on your new home. That determines how much financing you need to make the purchase. It also determines the mortgage you qualify for.
Read our recent post about this. Here
Available Options when Your Present Home Not Sold
Ideally, you want to sell your present home first and then use the sales proceeds to buy your next home. This process works smoothly. But, sometimes when you find the ideal new home and don’t want to lose it, you must look at other loan options.
Check out these loan options to help you get the perfect new home while you wait to sell your present home:
Bridge Loans: More fees than getting an equity loan. But, allows you to avoid making a contingent offer. Only a temporary loan to bridge the gap between your new mortgage and the purchase price. Consider a bridge loan as the down payment for your new home.
Piggy-Back Loans: Offers first and second mortgages simultaneously up to 80% of the home’s purchase price. This loan offers down payments of less than 20% while avoiding Private Mortgage Insurance (PMI) costs. Here’s how it works. The first mortgage handles 80% of the purchase price. The second loan takes care of 10% of the price. That leaves you with making a 10% down payment.
Low Down Payment Loan: Maintaining a strong credit score allows you to put your current home on the market and applying for a low down payment loan to apply to your new home purchase. Your DTI (see above) determines whether you qualify for this loan. Several federal government programs offer low down payments to qualified buyers like:
VA loans for service members offer 0% down; and
USDA loan for a property in rural areas also offers 0% down.
Home Equity Loans: Having equity in your current home allows you to apply for a home equity loan. Use the proceeds for a down payment on our new home while you wait for your pending current home sale to close. Also, a large enough equity allows you to buy a home without a sale contingency. In addition, you may apply for a home equity line of credit (HELOC). Both options allow you to borrow against your home equity.
Last Option – Lease Back
If none of the options above work for you consider making an offer of a Lease Back arrangement.
This allows you to get extra time to find your new home after you sold your current home. Your buyer decides to lease your present home back to you for typically between 60 to 90 days so you can stay put.
Of course, your buyer will ask for some compensation for not occupying your home after your sale closes. Two options exist. Either pay rent to your buyer or lower your sales price.
As you read here several options exist for you to get a mortgage when selling a home.
This guide explained these important factors:
- Timing about how long similar homes remain on the market before selling in your area;
- Making contingency offers to complete the purchase of your new home only after your current home sells;
- Looking at loan options when you haven’t sold your home yet; and
- Considering a Lease Back arrangement with your buyer to give you more time to find your ideal new home.
Consider Us as your Realtor to help you find you’re ideal new home and to list your current home for sale. Our Big Block Realtors can assist you with choosing the best loan options to buy your new home even if you haven’t sold your current home.
Steven Rich, MBA – Guest Blogger
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