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

Given their druthers, most people would sell their old house and buy their new house on the same day. But it's not always possible to time the closing of the sale and the closing of the purchase within minutes of each other.

"When moving in the same geographic area, nine times out of 10 you see the closing dates coincide with each other," says James Mason, director of sales for Internet lender MortgageIT. "Sellers and buyers usually coordinate with real estate agents so the dates do coincide and all parties are happy."

Sometimes, though, the dates don't coincide, despite everyone's best efforts. There are two types of poor timing, and ways to cope with both. First, a gap in ownership occurs when you have to sell your old house a few weeks or months before you buy your new one. Second, an overlap in ownership happens when you buy your new house before closing on the sale of the old one, forcing you to pay two mortgages for a while.

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A gap in ownership is the simpler problem to deal with. You might confront an ownership gap for various reasons. Perhaps you have sold your house and moved across the country and want to familiarize yourself with your new home town before buying a house. Or maybe construction of your brand-new house has fallen behind schedule, past the closing date on the sale of your old house.

"The most common approach," says Dave Herpers, director of consumer affairs for mortgage lender Amerisave, "would be to rent back the property from the new owner." Typically, he says, your monthly payment would be the same as the new owner's mortgage payment.

Staying in the house and renting it from the new owner is the cheapest and most convenient way to deal with the ownership gap because you have to pack your stuff and move it only once, without having to pay to store it somewhere and move it twice.

A shrewd seller will anticipate the ownership gap problem and accept an offer from a seller who is flexible about the move-in date. Even if that offer is for a little less money, it might save money in the long run.

If you can't stay in your house while you rent it, you'll have to move in with friends or relatives, or rent a place for a while.

"You don't want to eat up your profit in moving costs -- meaning two moves -- and storage costs and interim rental or hotel costs," says Ellen Bitton, president of New York-based Park Avenue Mortgage.

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.

-- Posted: March 15, 2004
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