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.
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
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,"
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.