Buying a New House Before Selling the Old One

Hi guys,

This is my first post.  I've been following the forum for quite some time now and you guys seem to always provide a lot of useful information. I thought I would ask for some tips or advice. I am looking at a new construction in Irvine, but need to sell my current home first to use the equity for a down payment. However if we sell our current home first, we have move twice which would be a major hassle. I googled and saw several options open to me.

1. borrow against my 401k (unfortunately, I don't have enough funds)
2. unsecured bridge loan (not sure my bank will give this to me)
3. HELOC (I have to research where I can get this and if it's worth it with the cancellation charge)
4. secured bridge loan (I will probably have to settle for this).
5. Rent-back agreement (but then we have no idea how long it would take for the new construction to be finished and that's assuming whoever buys our home wants to rent it out).

Has anyone gone through this situation or tried any of the above methods? Thanks in advance for any advice you may have.

x

^yep
Sell to investor to leaseback, otherwise sell and move twice.
All those other options doesn't work now, I've seen it work after the last crash around 2010 when builders were more lax with contingencies

jelloe said:

Hi guys,

This is my first post.  I've been following the forum for quite some time now and you guys seem to always provide a lot of useful information. I thought I would ask for some tips or advice. I am looking at a new construction in Irvine, but need to sell my current home first to use the equity for a down payment. However if we sell our current home first, we have move twice which would be a major hassle. I googled and saw several options open to me.

1. borrow against my 401k (unfortunately, I don't have enough funds)
2. unsecured bridge loan (not sure my bank will give this to me)
3. HELOC (I have to research where I can get this and if it's worth it with the cancellation charge)
4. secured bridge loan (I will probably have to settle for this).
5. Rent-back agreement (but then we have no idea how long it would take for the new construction to be finished and that's assuming whoever buys our home wants to rent it out).

Has anyone gone through this situation or tried any of the above methods? Thanks in advance for any advice you may have.

Click to expand...

HELOC works if you have enough equity in your existing home. Bridge loans are hard/impossible to find. Rates are so low that lenders don't get any profit from bridge loans. But SDCCU will offer you a 250k HELOC with no application fee or early termination fee. Essentially you use it as a bridge loan.

BTB / YF has no idea what he is talking about. HELOC is treated as down payment funds not a contingency. Yes, I have preapproved at new construction this way.

Downside is you're paying an awful lot for the luxury of only moving once. When your new home construction escrow closes, you may be neck deep in loans on both the new and old homes.  Have to hope to rent / sell the old one quickly. Secondly, IF you choose to sell the old one, you may have a pile of cash that you can use to pay down the new loan... but the monthly payments will still be high unless you find a lender willing to reduce it for a large one time pay down. Hope that makes sense.

Actually I was able to use option 3(HELOC against my new construction) to close escrow at the end of 2016 so its still a viable option from my first hand experience.  In fact, one builder (New Home Company) had their backup lender in the process to underwrite a first mortgage and HELOC for us when we were still in the running for Cressa.  So trust me builders do allow and even encourage it. 

One thing to keep in mind is that the HELOC runs at a much higher interest so make sure you sell your home quickly to avoid getting reamed - mine went from 5.375% up to 5.875% due to two quarter point increases by the Fed before i got to aelling my old home.

Rizdak said:

Downside is you're paying an awful lot for the luxury of only moving once. When your new home construction escrow closes, you may be neck deep in loans on both the new and old homes.  Have to hope to rent / sell the old one quickly. Secondly, IF you choose to sell the old one, you may have a pile of cash that you can use to pay down the new loan... but the monthly payments will still be high unless you find a lender willing to reduce it for a large one time pay down. Hope that makes sense.

Click to expand...

You can avoid the monthly being high on the first mortgage by having the lender strucure it as a 10-15-75:

10% down payment
15% HELOC
75% mortgage

This eventually results in the same thing as having put down 25% on the new conatruction.  You can toy with the percentages if it doesnt work in your case plus worst comes to worst you can refi out after escrow closes too.

The lender for the new home you are buying is going to qualify you based on the PITI for your existing home plus the PITI for your new home.  That was a surprise to me when we bought our current home but fortunately my income was sufficient. 

Not selling the old home would have debt that is calculated when borrowing the new home no matter what you HELOC, OP may need the old debt off the books to buy the new one

*post at the same time, lol, what irvine buyer said

when we bought our new construction home we were hoping for a rent back from whomever we sold our home to, but we ended up going with a real family who wanted to move in right away instead of the cash investor.  they offered us more $$$ anyway.

so we rented a 3 bed apt for 5 months and put half our stuff in storage.  it was a PITA and had to move twice but worked out okay.

x

jelloe said:

5. Rent-back agreement (but then we have no idea how long it would take for the new construction to be finished and that's assuming whoever buys our home wants to rent it out).

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Actually the builder will give buyer a pretty good idea when the new construction will be finished and a estimated date of closing of escrow.  There might be some delays but usually within a just a few weeks.

Like others have suggested, just sell first and rent back.  This is pretty common method and a lot of buyers has done so.  Find a good realtor and write up a good rent back agreement.

Some thoughts:

1. borrow against my 401k (unfortunately, I don't have enough funds)

Does that also mean you do not have enough $$$ for your required cash reserves? Most lenders will require 6 months PITIHOA for the present home and 2 months PITIHOA for the departure residence. If you do not have enough cash reserves in any purchase scenario (5, 10, 15 percent down or lower) then selling your home may be the only option.

2. unsecured bridge loan (not sure my bank will give this to me)

Bridge loans are secured. Mortgage lenders do not allow unsecured loans for down payments. No, your bank won't give you a bridge loan or an unsecured loan because if they exist, they are at such tight guidelines (bridge) or so small as to be of no use (unsecured)

3. HELOC (I have to research where I can get this and if it's worth it with the cancellation charge)

If you open a HELOC, the LO and the Underwriter will ask "Are any of these funds being used for the purchase of another property?" You'll need to make the moral decision on this as saying it's NOT for the purchase of a new home would constitute a prosecutable misstatement. A few HELOC vendors will offer lines on what will be a Non-Owner Occupied transaction (PenFed is one). Most early termination fees are $500 or so, relatively little given that you've not drawn funds unless absolutely needed for the purchase.

4. secured bridge loan (I will probably have to settle for this).

Would be interested to hear who is offering a bridge loan. These are secured first against your PURCHASE residence first, then your DEPARTURE residence second. Once your departure home is sold, the lien on your purchase residence is extinguished. Any other scenario proposed by your loan officer is simply a HELOC and not a bridge.

5. Rent-back agreement (but then we have no idea how long it would take for the new construction to be finished and that's assuming whoever buys our home wants to rent it out).

The best of both worlds IMHO. You've sold your home at a good price. You've cleared out your debt obligation on the property. Many buyers are willing to wait 60-90-120 days if you sell at fair market value, not top dollar. Your buyer pool shrinks terribly if you want $800k since your neighbor sold at $790k AND you want a 6 month rent back. Don't be that guy. Solid Agents here on the forum can get you taken care of.

Yes, the builder aligned mortgage companies can assist with a departure residence HELOC's simultaneously with your purchase loan. Be sure to get in writing that the HELOC is for a rental property, not an owner occupied home. You avoid all that "mortgage fraud" stuff when the procedures are followed correctly.

Can you put less cash down as a temporary measure? Sure. The difficulty is that debt to income ratios for an 80% Loan To Value mortgage might go to 43-45% for a Jumbo Loan, and up to 50% for a Conforming Jumbo. Once you get to 85% Loan To Value, ratios are 39-43%. At 90% LTV they are 38-41% (on average) and 95% LTV loans are even tighter. Cash reserves also increase with some lower down transactions.

In all but the Rent Back scenario will lenders use the new home and the old home expense in calculating debt to income ratios. Hopefully you've got the kind of income capable to overcome DTI issues.

Many (not all) lenders allow for gifts for the down payment or cash reserves as long as you have 5% of your own funds invested in the deal. Not everyone has a rich uncle to ask favors of, but if anyone does, this remains an option. If they are overseas, best to get the funds here ASAP, rather than a few weeks prior to closing. When waiting to bring funds over the chance for loan approval failure geometrically expands.

My .02c

Soylent Green Is People

upon9k said:

Rizdak said:

Downside is you're paying an awful lot for the luxury of only moving once. When your new home construction escrow closes, you may be neck deep in loans on both the new and old homes.  Have to hope to rent / sell the old one quickly. Secondly, IF you choose to sell the old one, you may have a pile of cash that you can use to pay down the new loan... but the monthly payments will still be high unless you find a lender willing to reduce it for a large one time pay down. Hope that makes sense.

Click to expand...

You can avoid the monthly being high on the first mortgage by having the lender strucure it as a 10-15-75:

10% down payment
15% HELOC
75% mortgage

This eventually results in the same thing as having put down 25% on the new conatruction.  You can toy with the percentages if it doesnt work in your case plus worst comes to worst you can refi out after escrow closes too.

Click to expand...

Thanks everyone for your replies.  I'm really conservative with my finances.  I do have 20% to put down.  I was hoping to use the 30% in our equity so our mortgage would only be 50%.  We're trading up, so even with all of this my mortgage would increase by quite a bit.

jelloe said:

Thanks everyone for your replies.  I'm really conservative with my finances.  I do have 20% to put down.  I was hoping to use the 30% in our equity so our mortgage would only be 50%.  We're trading up, so even with all of this my mortgage would increase by quite a bit.

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Ok if you have 20% down I wouldn't mess with anything above.  Honestly, it's a lot of headache option 1-4, 5 is debatable depending on who your buyer is.  I would just close on the new construction and then cash IN refi (pump in the 30% during the process) after you sell the old property.  You will still get to 50% LTV mortgage with much less headache - at least for us we did it only because there weren't other options.

Agree w/ 9k. If you've got 20% and can qualify as-is with keeping the exit property, that is the easiest. After you sell you can pay down your mortgage on the new property and do a "recast" (most banks allow) and it'll re-calculate your monthly payment based on the new principal amount.

I choose rentback.

In most cases, the buyer is okay with that unless they are in a situation similar to yours.

In our case, even though our buyer was supposed to be owner-occupied, they asked us to extend our rentback if possible, I found out from our former neighbors that it ended up being a rental as they've had more than one neighbor over the last few years.

Only problem about rentback, keeping the house in good condition so that you don't owe your "landlord" more repairs when you leave.

I'd then add this in general for reader/lurkers in this same position:


6) I have 20% down, but ratios are high with the departure residence still there.

If you have 30% equity (verified by a separate appraisal), can get a rental agreement that conforms to a lender obtained "Market Rent Survey (completed by the same appraiser) and a deposit check for the rent is given and cashed by you, then 25% of the rental income can be used to offset the mortgage payment only.

Secondarily, if your home is under contract, the buyer has lifted all contingencies, and there is either an underwritten loan approval OR evidence of enough cash to buy your departure home, most lenders will not count the departure residence payment in your debt to income ratios. The home doesn't have to close, but meet the rest of the guidelines.

Remember, this is only if a person has separate down payment funds outside of the sale and that ratios remain a qualifying issue.

My .02c

Soylent Green Is People.

Thanks 9K.  I didn't even think about refi.  I'll start exploring this option too.

Thanks potsticker.  Had never heard of recast, but looks like a great option.  It's almost like refinancing but without all the fees?  I like it especially if I can lock in at a low rate.

And thank you soylent for the most detailed replies.  I'm so glad I decided to post something and ask for help.  All this information has been great guys.

jelloe said:

Thanks 9K.  I didn't even think about refi.  I'll start exploring this option too.

Thanks potsticker.  Had never heard of recast, but looks like a great option.  It's almost like refinancing but without all the fees?  I like it especially if I can lock in at a low rate.

And thank you soylent for the most detailed replies.  I'm so glad I decided to post something and ask for help.  All this information has been great guys.

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Recasting is usually a one-time option to pay down your loan and adjust your payment - but keeping the same terms (rate, years remaining, etc). There is a small fee (I think Chase does it free) - I think a couple hundred bucks for processing. But, it's not as complicated as a refinance. For a recast, send a letter and check and it'll be done within 30-60 days.

We are in a similar situation and was fortunate enough to do a lease back. 
We bought a new build 8 months away from COE back in March 2017 for October 2017 COE. 
We listed our house for sale in July 2017.  Sold it Sept 2017.  Lease back till Oct 2017. 
If you price your house correctly and have good Realtors that market, stage and prep your home for sale, you should have no problem selling it within a couple of months. 
Good Luck.