Mortgage round-trip: Timing a home sale, home purchase -- page 2

An ownership gap can be a logistical hassle and can erode the profit you make from the sale of your home. An overlap, in which you close on your new home before you close the sale on your old home, can cause aggravation too. Your lender might not even allow you to do it.

If you have overlapping mortgages, you have to qualify for the combined monthly payments as if it were one big home loan -- even if the overlap period is just a week, Herpers says.

To qualify for a loan, your mortgage payment and total debts must not exceed certain percentages of your income (the exact percentages vary, based on your credit score and other factors). Those percentages are called the mortgage and debt ratios or front-end and back-end ratios. Whatever a lender calls them, "If you exceed the ratios, you will get declined for your new loan request," Herpers says.

Let's say your lender looks at your ratios and determines that you can handle a maximum mortgage payment of $2,200 a month. If you are paying $1,000 a month on your current house, and the payment on your new house would be $1,500 a month, the lender won't let you take out that second loan because you can't afford $2,500 in mortgage payments. You'll have to wait until you close the sale on the old house.

There are ways to get out of this trap. One way is to get a "no-ratio" mortgage, in which you don't state your income but you verify your employment and assets. If you have a good credit history, you might be able to qualify for a no-ratio mortgage. The rate would be higher than for a conventional mortgage, but you could refinance later.

A bridge loan is another method of swinging two payments. "A bridge loan takes into account the fact that somebody needs money for a short amount of time to bridge the two closings," Bitton says. A bridge loan is backed by the equity in your old house. Typically, it is available only if someone has signed a contract to buy the old house. Rates on bridge loans often are the prime rate, plus 2 percentage points.

If you use a bridge loan, you end up with three loans -- the bridge loan and mortgages on two houses. But the bridge loan acts as your down payment. It reduces the loan amount -- and thus the monthly payment -- for the new home, and that might be enough to let you qualify for the mortgage.

In lieu of getting a bridge loan, you could make a down payment by drawing on a home equity line of credit on the old house. Rates on equity lines of credit tend to run more than a point lower than rates on bridge loans, and you usually don't have to pay closing fees. But you might pay a penalty fee if you sell the house less than a year after taking out the line of credit.