Apr 8, 2019

"How do I buy a new home before selling the home I already own?"  I get asked this question a lot.

There are many reasons to buy a new home (or new-to-you home) before selling your "departure residence."  Maybe you're afraid to sell before you find the home-of-your-dreams because you risk not finding a home in time and living out of your car.  Maybe you recognize the benefits of getting all your junk valuables out of your current home before putting it on the market.  Or perhaps you want a little extra time to paint or install flooring in the new home without living in a construction zone.

Yet many buyers need the equity from the departure residence for a down payment on the new house.

Luckily, there are several ways to accomplish buying a new home before selling a departure residence.

1.  Extend a Contingent Offer.
A contingency addendum states that you will list your departure residence for sale within five days of negotiating a contract to purchase a new home.  Ideally, both transactions would close on the same day (or within a few days of each other) so you can use the proceeds of the sale as down payment for the purchase.

The downside?  It's still a competitive real estate market.  You may be competing with other buyers who want to purchase the same home.  And a seller would almost certainly choose a non-contingent offer over an offer that will only close if/when another home sells.

2.  Home Equity Line of Credit
You could also take out a home equity line of credit (HELOC) on the departure residence to give you a down payment for the home-of-your-dreams.  The key here is that a) you won't be able to access all of the equity in the departure residence and b) you have to get the home equity line of credit before you list your home for sale.

Lenders will have a maximum "combined loan to value" (CLTV) for home equity lines of credit.  That means they won't allow you to borrow more than a certain percentage of the value of your home.  And that percentage takes into consideration any other mortgages or liens against the home.  Many banks restrict HELOCs to 80% CLTV (although some will go to 90%).  At 80% CLTV, if your home is valued at $400,000, the maximum amount you can borrow against it is $320,000.  If you already have a $200,000 mortgage, that would only leave $120,000 for your home equity line of credit.

And beware!  The bank might not extend credit if you tell them you plan to use the money to buy a new house and close the HELOC shortly thereafter.  Banks make money on HELOCs when you pay them interest.  If they know you're planning to sell the departure residence (and thus pay off the HELOC and close the account), they might decide not to extend credit at all.  And they almost certainly won't give you a HELOC on a home that is already listed for sale.

3.  Low Down Payment and Recast
Many home buyers don't need a huge down payment to purchase a home.  In fact, standard, vanilla, conventional loans only require 5% down.  If you already have a small down payment, you may be able to purchase the home-of-your-dreams without selling your departure residence.  However, you will have to pay mortgage insurance if you're not putting 20% down.

Once you've sold the departure residence, you can use the proceeds to pay down the balance of your existing mortgage and "recast" the loan.  A mortgage recast allows the servicer to recalculate the monthly payment based on the current balance versus the initial loan amount.  You keep the same interest rate and the same due date.  The only thing that changes is the monthly payment.

And if you pay down the loan within 120 days of closing, you may also be able to cancel your mortgage insurance (otherwise mortgage insurance must be paid for two years, regardless of how quickly you pay down the balance).

Be forewarned!  Not every lender allows a recast and they're not available on every type of loan (government loans can't be recast, for instance).  And some lenders won't allow the mortgage insurance to be canceled.  Make sure you ask a lot of questions of your loan officer before you embark on a plan like this.

Regardless of the route you choose, know that this is a common problem with many possible solutions.  Talk to your favorite local lender to find the best solution for you!