The Charlotte housing market is off to a robust start this year with increased sales activity. Buyers who have a home to sell often have questions of how to buy before selling. After all, the logistics of buying and selling a home in the same timeframe require some strategy to make the transition as smooth as possible.
For some buyers they may choose to have a simultaneous close. This means the closing for the sale of their current home occurs on the same day as the closing for the purchase of their new home. For other clients the timing is such that they want to purchase a few days or weeks prior to selling their current home. This strategy requires some extra considerations.
From the financing perspective the easiest way to buy before selling is to simply qualify with both mortgage payments – the payment on your current home as well as the one being purchased. Even if you are selling immediately after buying your new home both mortgage payments must be counted in qualifying ratios.
Two major considerations when qualifying with both mortgages are documenting sufficient reserves for both mortgage payments and structuring the new mortgage to meet both short- and long-term goals.
Depending on the loan program six months’ reserves for the mortgage payment on the current house as well as the new one may be required. Reserves are assets in addition to the down payment and closing costs for the new home. They can be held as liquid funds like checking/savings account balances as well as securities like a brokerage or retirement account.
The second consideration when buying a home before selling your current one is evaluating the structure of the loan. For some clients their preference may be to provide a 20% down payment from the proceeds from the sale of their current home. If the home won’t be sold until after the new one is purchased, it can be difficult to tap into the current home’s equity. One way to achieve the desired long term strategy is for the buyer to provide a smaller down payment (as low as 5%) and opt for a combo loan. As an example, the combo loan would have a first mortgage equal to 80% of the sales price and the second mortgage would make up the difference (up to 15% of the sales price). With a combo loan structured this way, the client can then pay off the second mortgage at a later date with the proceeds of the sale of the current home keeping the first mortgage at the desired 80% loan to value.
If you’re considering selling your current home and buying a new one, please know this is a common occurrence and very achievable. Don’t miss out on our strong housing market – consult with a trusted Realtor and lender to determine the best way to achieve your dreams of a new home!
Rebecca Richardson is a Charlotte mortgage banker who excels at helping clients choose the appropriate mortgage strategy and enjoys demystifying the financial process on her blog at rebeccarichardsonmortgage.com. She can be reached by email or at 704.488.8883.