Your family is getting bigger and now you want a bigger home, or your kids are married or have relocated and now you want to downsize. Time to juggle, but pay attention so you don’t drop the balls.
The two important questions you should ask yourself when you want to sell your current residence and buy another one are: (1) Do you have the capacity to carry two homes if necessary? (2) If not, what are your options in terms of structuring and securing your mortgage financing?
It may be as simple as (a) Look for a new home. (b) Pay cash or get a mortgage on new home. (c) Sell old home. (d) Move out of old home. (e) Move into new home. Often, though, you are dealing with timing issues, not just of your home, but the timing of the buyer of your home and the timing of the seller of your new home, in addition to the schedules of the attorneys representing all the parties.
Where do you start? I would suggest that before you go looking for a new home that you get your financing plan in place. If you have the wherewithal to carry two homes, then start looking and go make offers with confidence. All-cash offers often put you ahead of any of the other offers and put you in a stronger negotiating position. Even if you do have the ability to carry two homes, why would you want to? Answer: You wouldn’t, unless you plan on keeping and renting out your old home, the market slowed down and you are not getting offers in the time frame you need, you are building a new home and need a place to live, or the seller of your new home needs to close quickly and has multiple bids. After all why pay the vig on two homes if you don’t have to? I might add that even if you have the ability to close with cash before the sale of your existing home, you may want to consider mortgage financing on the new home. You can lock in a good mortgage rate and low payment and not have to liquidate those assets giving you a higher return on your money.
The real juggling begins when you do not have the ability to carry two homes, and/or you need the proceeds from the sale of your existing home to buy or build a new home. Throw the balls up in the air and watch them go round and round and follow my suggestions to keep them from falling down:
Ball One—Work up numbers to get the maximum purchase price you can qualify for and target the homes in your price range. Make sure you can qualify for a mortgage on a new home subject to the sale of your existing home (and make sure that there is a contingency in your purchase contract as well).
Ball Two—Review the best financing options and deal structure. Your liquidity, income, and short/long-term goals will determine the best way to structure your financing. There are many options such as:
(1) Refinancing and cashing out on your existing home to buy your new home. The pressure of selling your existing home is reduced, and when you do sell your old home that mortgage is paid off leaving you with no mortgage.
(2) Taking an equity line out on your existing home and using that in combination with a new purchase money mortgage, and then when you sell your old home, you pay off your equity line and are just left with one mortgage on your new home. This allows you to lock in your rate and minimize rate risk.
(3) Taking a purchase money mortgage on your new home.
(4) Closing on the new home with purchase mortgage financing and renting the home back to the sellers for two to three months, which allows you more time to sell your existing home.
Ball Three—Be involved with your attorney, broker, and mortgage advisor and make sure everyone is on the same page in terms of timing the closings. You need to plan and time the sale of your existing home and the close on your new home for many reasons such as: (a)Your mortgage commitment requires that you sell your old home first (otherwise you can’t qualify to buy the new home, because of income limitations, cash limitations, or both). (b) You have a great mortgage rate locked in and want to make sure that you keep it (if rates move up and you go past the rate lock date you typically will be subject to the higher rate unless you paid for an extension). (c) What I call the life factor—meaning stuff happens, and if stuff happens in between, the deal can begin to unravel. Ideally you want to strive for a simultaneous closing, which means you sell the old home and buy the new home the same day and preferably back to back (one after another). Practice and…Keep those balls in the air!
Carl Guzman, NMLS# 65291, CPA, is the founder and President of Greenback Capital Mortgage Corp. He is a residential financing expert and a deal maker with over 25 years’ experience. Carl and his team will help you get the best mortgage financing for your situation, and his advice will save you thousands!
by Carl Guzman