When you own a home and want to sell it to buy a place that’s nicer, you are likely to confront two obstacles:
■You need a down payment to buy Home No. 2, but you can’t get hold of that much money until you sell Home No. 1.
■You want to qualify for a mortgage on House. No. 2 while you’re still on the hook for the loan on Home No. 1.
These problems are easily solved if you’re willing to sell your home and live elsewhere while you look for another home. But what if you don’t want to do that? What if you’re the typical move-up buyer who wants to move directly from one home and into the other?
The simplest scenario, says Lori Jasicki, a senior loan officer and a branch manager with Inlanta Mortgage in Brookfield, Wis., is to make your purchase offer contingent on the sale of your home. But in a competitive market, it can be tough to find a seller to accept that contingency.
Some local or regional banks offer a bridge loan, but they’re challenging to find and very difficult to qualify for, says Josh Moffitt, president of Silverton Mortgage Specialists in Atlanta.
“Homeowners who don’t have the cash to make a down payment on their next home can tap into an existing home equity line of credit or get one before they put their house on the market,” says Malcolm Hollensteiner, director of retail lending products and services for TD Bank. “A lender won’t give you a line of credit once your home is on the market.”
However, borrowers will have to qualify to make the payments on their current first mortgage, their home equity line of credit and the mortgage on the next home when they’re ready to move.
“The lender will count the current loan as part of the debt-to-income ratio, unless your house is under contract with a verified deposit and a financial commitment letter from the buyer,” Hollensteiner says. “The sellers would also have to prove that they have significant cash reserves just in case the deal would fall through.”
MVB Mortgage, a regional bank that offers loans to customers in Washington, D.C., Maryland, North Carolina, South Carolina, Virginia and West Virginia, recently introduced a “cross-collateralization loan,” which helps clients transition from one home to the next.
They do this by making a loan on the equity in the homeowners’ current home. The borrower makes monthly interest-only payments. The loan is paid in full when the home is sold. The borrower agrees to sell within 12 months.
“Because these are portfolio loans, we don’t generally have to follow Fannie Mae or Freddie Mac guidelines,” says Jay Richardson, a senior loan officer with MVB Mortgage in Fairfax, Virginia. “We qualify borrowers on the end loan only because the current home will be paid off as soon as the house sells.”
Richardson says the minimum required credit score in most cases is 700, and that an approval can depend on the cash reserves of the borrowers, as well as the amount of home equity.
For example, if the borrowers intend to buy a $700,000 home, they need at least $175,000 of equity. Move-up buyers making a big leap in home price may need to come up with additional down payment funds.
Jasicki says buyers may qualify for 100 percent financing with a USDA loan or a VA loan if they have unused VA eligibility.
FHA loans require down payments as low as 3.5 percent. Loans backed by Fannie Mae and Freddie Mac can have down payments as low as 3 percent, although availability is limited. These home loans require mortgage insurance.
So-called piggyback loans were popular during the housing boom that collapsed in 2008. With a piggyback loan, the borrower gets a primary mortgage for 80 percent of the home’s price, plus a home equity line of credit for 15 percent. (The HELOC “piggybacks” on the primary mortgage.) With this loan structure, the borrower makes a down payment of 5 percent.
“We recently brought back 80-15-5 loans, which could help move-up buyers since they need to only come up with a 5 percent down payment,” Moffitt says. “They can pay off the 15 percent loan when their home sells, and they avoid paying private mortgage insurance.”
Moffitt says some move-up buyers borrow from their retirement accounts for their down payment and then repay the loan as soon as their house sells, although he warns that borrowers need to carefully review the rules about that type of transaction.