Buying a New Home When You Haven't Sold the Old One
There are many reasons why you might need to buy a new house while your old one's still on the market -- you want to make the deadline for the $6,500 tax credit for repeat home buyers, your job has been transferred or you just found the perfect house and don't want it to get away. However, thanks to the housing crisis, it isn't as easy to get financing for this kind of transaction as it used to be.
The Good Old Days
In the past, buying a new home before unloading the old home wasn't an especially difficult task. If you didn't have your home in escrow, you got a tenant and a rental agreement, and the new lender credited you with the rental income to offset the mortgage payment. You could even buy the new home with an 80% first mortgage and a 20% second mortgage, then pay off the second when you sold your old house. But those were the good old days. Thanks to the promotion of strategic default by companies like You Walk Away and some shady real estate agents and mortgage brokers, it's harder for legitimate sellers to buy new homes. These folks encouraged buyers to get someone to sign a rental agreement, then walk away from the old house as soon as they had a new one -- neatly sidestepping the effect that a foreclosure would have had on their efforts to find housing.
New Home Loans in the 'Bad New Days'
To keep lenders from losing money on walk-away borrowers, Fannie Mae, Freddie Mac and the Federal Housing Administration (FHA) have toughened up their requirements for sellers who want to be buyers.
FHA loans can be granted when you haven't sold your home, but you must prove that you need the new house because:
- You must relocate because of a job transfer or change that makes it impracticable for you to commute from your current home;
- You are moving out of a jointly owned home (for example, a divorce situation) and purchasing a new home; or
- Your family size has increased to the point that you need a larger home to accommodate it.
In addition, FHA mortgage lenders require that you get an appraisal on the old house and pay your mortgage balance down to 75% of its value before closing on the new property purchase. This is to thwart strategic defaulters.
Fannie Mae has similar restrictions. If your current home is in escrow but will not close before your purchase, you have to have a reserve fund of six month's payments (including property taxes, insurance and HOA dues) for the escrowed property, and you have to produce a valid purchase agreement and prove that all financing conditions have been cleared by the buyer.
If the property has not sold and is being converted to a rental, you will need to produce the following:
- Fully executed lease agreement;
- Security deposit (with a copy of the check); and
- Bank statement showing that the check has been deposited.
In addition, mortgage lenders need to get an automated valuation, an appraisal or a broker price opinion (BPO) of your current home. If you have less than 30% equity, you will not be able to use the rental income to help you qualify for your purchase. In other words, your debt-to-income ratio will have to meet underwriting guidelines while you're being dinged for two house payments and get no credit for rental income. If you have at least 30% equity, you'll get credit for 75% of the rental income.
Freddie Mac's guidelines are almost identical to Fannie's. So, you can buy a new home and leave your old home unsold if you have 25% to 30% equity in it (and have the income to qualify or enough rental income to offset the payment), or enough income to qualify with both payments on your books. If you can't do that, you'll have to rent out your old place, move into a rental of your own and then apply for a mortgage once you have a new tax return showing rental income from your old house. Unless, of course, they change the rules again. We'll keep you posted.
Gina Pogol has been writing about mortgage and finance since 1994. In addition to a decade in mortgage lending, she has worked as a business credit systems consultant for Experian and as an accountant for Deloitte.
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