Do I Need to Sell My Current Home Before I Can Buy a New One?
Although every situation is different, it is not uncommon for home buyers to qualify for a mortgage on a new home while still living in their current home. Whether you are looking to purchase FHA, FHA 203K, Homepath or Conventional, the guidelines aresimilar.
Maybe your family has grown and you need more space or you got a can’t miss job offer in another city?
Regardless of the motivation for keeping one property while purchasing another, lets 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 answersand 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 Yes!
Qualifying based on your DeDebt-to-Incomeatio is one thing, but remember to budget for the additional expenses of maintaining multiple properties. Everything from mortgage payments, increased property taxes and homeowner’sinsurance 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 FHA and Fannie Mae “Buy and Bail” Rules.
To prevent potential home-buyers from using rental income to purchase a new home in an effort to get out of the current home which is underwater, lenders typically follow guidelines which restrict home-owners from using rental income if they lack significant equity in their current home.
Without that hefty amount of equity, you will have to qualify to afford BOTH mortgage payments regardless of whether you are receiving rents or not.
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 arent 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.
The Motivation Factor
Mortgage Lenders are very sensitive to the misuse of FHA and Conventional OCCUPANCY guidelines. Owner occupants, people occupying a house as their primary residence, represent less risk to mortgage lenders.
Less risk means that owner occupants get better interest rates and more flexible credit qualifications.
What does this mean to you? It means that the burden of proof on buying a new home as a primary a residence when you currently own is on you. If you own a$250,000 home a couple miles from where you want to buy a$150,000 home then expect someinterrogationfrom underwriting on you motivation.
Your motivation needs to make sense and be documentable or you may have issues buying your new home.
Other Factors to Consider
If you have an FHA loan there are a lot of additional guidelines to consider if you want to get another one. I could use an entire post outlining the details. Just know that if you already have a FHA loan then getting another FHA or FHA 203K loan is going to be a challenge.
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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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