In a perfect world, you would sell your current home and buy
your new home on the same day, moving seamlessly from one mortgage
to the next. While this seamless transition has worked out for some
, others have managed to sell their homes and rent them back until
they find a new home to buy.
But if neither of these timing options works for you, you'll
need to secure a financing option that lets you buy your next home
before you've sold your existing home.
Here are five financing avenues to explore that may help you in
the move-up homebuyer process.
No. 1: Bridge loan or wrap financing.
"Bridge loans have not quite gone the way of the dodo, but they are
extremely rare," says Scott Davis, branch manager of Homestead
Funding Corp. in Fairfax, Va.
Jon Bass, executive vice president and director of marketing and
advertising for BB&T in Greensboro, N.C., says that homeowners
need substantial home equity, excellent
and income to qualify for a bridge loan.
Bass says a bridge loan, which wraps your payments for your
current home and your next home into one loan, typically lasts for
six months up to a maximum of 12 months. Rates for these
interest-only loans currently range between 6.5 and 8.0 percent,
with a maximum debt-to-income ratio for a bridge loan is 40
percent, says Bass.
However, Bass says BB&T calculates your debt-to-income ratio
based on a payment of 1 percent of the loan amount just in case it
takes longer to transition to a permanent loan. For example, if the
combined value of both your current home and your new home is
$300,000, your ratio would be calculated based on a payment of
$3,000, even though the monthly payment on a 6.5 percent
interest-only loan would only be $1,625.
Calculate your monthly mortgage payment
"Your bridge loan can only be up to 80 percent of the combined
value of both the homes you're using as collateral," says Bass.
Borrowers must pay bridge loan closing costs, including a loan
origination fee of 0.5 percent to 1 percent, and then pay closing
costs for the mortgage on their next home.
No. 2: Home equity line of credit or cash-out
. Tim Ross, president and CEO of Ross Mortgage Corp. in Royal Oak,
Mich., says that a home equity line of credit can only be approved
for a home that's not on the market. He says most lenders offer
home equity lines of credit up to 80 percent of your home
"If you wanted to use a home equity line of credit for a down
payment on your next home, you would have to qualify for all three
loan payments: your current loan, your home equity loan and your
next mortgage," says Ross.
Michael Jablonski, executive vice president and retail
production manager for BB&T Mortgage in Wilson, N.C., says a
is also an option, but he doesn't recommend it because the upfront
closing costs and fees are very expensive.
"You always have to realize that borrowing money will impact
your next transaction," says Jablonski. "You'll have to qualify for
your next mortgage as well as the payments on the cash-out
No. 3: Borrow from relatives
. If you have relatives willing to provide you with cash to make
the transition from one home to another, that can be a good
solution to your move-up dilemma as long as they are also willing
to provide the appropriate paperwork.
"You have to paper-trail everything now for a loan, so you would
have to show where the money comes from," says Davis. If the money
is a loan, you'd have to document a payment plan as part of your
Ross says you can use gift funds for your entire FHA down
payment but your relations would need to be providing the funds as
a gift rather than a loan.
The rules for down payment gifts on a conventional loan are
slightly more complicated. If your down payment is 20 percent or
less, only 5 percent can come from gift funds, but if your down
payment is above 20 percent, the entire amount can be a gift.
No. 4: Borrow from your 401(k)
. "If your company allows it, it may be worth exploring the option
of borrowing from your 401(k) because you can repay yourself when
you sell your home," says Jablonski. "Make sure you know your
employer's rules and that you are not incurring any IRS
Most 401(k) plans allow you to borrow up to $50,000 or 50
percent of your vested balance, whichever is smaller.
No. 5: Take out a personal loan
. Davis says homeowners without enough equity or enough available
funds in a 401(k) may qualify for an unsecured personal loan.
However, he says the interest rate on these loans is typically
around 15 percent and usually last for just a few years. In
addition, the borrower would have to include payments on that loan
when qualifying for a mortgage on their next home.
For homebuyers moving up from one home to the next, it's either
going to take enough income and assets to qualify for two
mortgages, the ability rent back your former home while you shop
around, or a helping hand from a family member.