Do I Need To Sell My Home Before I Can Qualify For A New Mortgage On Another Property?

Although every situation is unique, it is not uncommon for homebuyers to qualify for a mortgage on a new home while still living in their primary residence.

Perhaps you are outgrowing your current house, or have been forced to relocate due to a job transfer?  Regardless of the motivation for keeping one property while purchasing another, let’s address this question with the mortgage approval in mind:

So, Do I Have To Sell?

Yes. No. Maybe. It depends.

Welcome to the wonderful world of mortgage lending. Only in this industry can one simple question elicit four answers…and all of them may be right.

If you are in a financial position where you qualify to afford both your current residence and the proposed payment on your new house, then the simple answer is No!

Qualifying based on your Debt-to-Income Ratio is one thing, but remember to budget for the additional expenses of maintaining multiple properties. Everything from mortgage payments, increased property taxes and hazard insurance to unexpected repairs should be factored into your final decision.

What If I Rent My Current Property?

This scenario presents the “maybe” and the “it depends” answers to the question.

If you’re not quite qualified to carry both mortgages, you may have to rent the other property in order to offset the mortgage payment.

In that scenario, the lender will typically only count 75% of the monthly rent you are proposing to receive.

So if you are going to receive $1000 a month in rent and your current payment is $1500, the lender is going to factor in an additional $750 of monthly liabilities in your overall Debt-to-Income Ratios.

Another detail that can present a huge hurdle is the reserve requirement and equity ratio most lenders have. In some cases, if you are going to rent out your current home, you will need to have at least 25% equity in order to offset your payment with the proposed rent you will receive.

Without that hefty amount of equity, you will have to qualify to afford BOTH mortgage payments. You will also need some significant cash in the bank.

Generally, lenders will require six months reserve on the old property, as well as six month reserves on the new property.

For example, if you have a $1500 payment on your old house and are buying a home with a $2000 monthly payment, you will need over $21,000 in the bank.

Keep in mind, this reserve requirement is incremental to your down payment on the new property.

What If I Can’t Qualify Based On Both Mortgage Payments?

This answer is pretty straightforward, and doesn’t require a financial calculator to figure out.

If you are in this situation, then you will have to sell your current home before buying a new one.

If you aren’t sure of the value of the home or how your local market is performing, give us a ring and we’ll happily refer you to a great real estate agent that is in tune with property values in your neighborhood.

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As you can tell, purchasing one home while living in another can be a very complicated transaction.  Please feel free to contact us anytime so we can review your specific situation and suggest the proper action plan.

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Related Articles – Mortgage Approval Process:

Making Sure Your Cash-To-Close Comes From The Proper Source

Providing proper asset documentation and the actual source of the funds is a critical element of the loan closing process.

There’s nothing worse in a real estate purchase than making it all the way through the hoops and hurdles just to have a loan denied after the final documents have been signed due to the borrower using the wrong checking account for the down payment.

Seasoning of the down payment money is just as important as the source, which is why underwriters typically require at least two months bank / asset statements in the initial mortgage approval process.

A Few Acceptable Sources Of Down Payment Include:

  • Bank Accounts – checking / savings
  • Investment Accounts – money market, mutual funds
  • Retirement Funds – keep in mind that borrowing against a 401K plan will require a repayment, which will be calculated in the Debt-to-Income Ratio
  • Life Insurance – Cash value and face amount
  • Gifts – Family members can gift down payment funds with certain restrictions
  • Inheritance / Trust Funds
  • Government Grants – Many state, county and city agencies offer special down payment assistance programs

It is extremely important to make sure your loan officer is aware of the exact source of your down payment as early in the process as possible so that all necessary questions, documentation and explanations can be reviewed / approved by an underwriter.

A good rule-of-thumb to remember is that whatever funds you’re using as a down payment have to be pre-approved by an underwriter at the beginning of the mortgage approval process.

Basically, if you accidentally forget to deposit money in your checking account on the way to the closing appointment, it is not acceptable to get a cashier’s check from a friend’s account until you have a chance to pay them back later.

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Frequently Asked Questions:

Q:  What if I don’t have a bank account and cannot properly source my funds to close?

Cash on hand is an acceptable source of funds for some loan programs, but make sure you bring that detail up at the application stage

Q:  Can I use a bonus from my employer for my down payment?

Yes, but generally this needs to be a bonus you regularly receive

Q:  Can I borrow the money from a friend?

No, any money that needs to be repaid is typically an unacceptable source of funds

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Related Articles – Closing Process / Costs