Moving from one property to another can be stressful enough. With packing, hauling, and organizing, you have enough to deal with as is.
But many people worry about selling their property before buying a new home. Because they don’t want to carry two loans, they assume they’ll have to sell first, then buy. But what if they can’t find a property after they sell? There is also the concern that they won’t qualify for loan unless they sell their current property first.
Fortunately, there are four simple ways to avoid selling your property before buying a new home.
Four Ways to Avoid Selling Your Property Before Buying a New Home
1. Cross Collateralization
This is a popular option for borrowers who are moving into a new property and need a loan that allows them to transfer equity. Essentially, this loan program will take the equity position of both properties into consideration to create a total loan amount on the new property. It can have a down payment as low as 0%, as long as the combined loan-to-value ratio is less than 65%. It’s popular for auto loans and homes, but is often ideal for borrowers who have high equity on their current home.
Here’s an example of how cross collateralization might work:
The first step is to calculate the total value of the properties, regardless of loan status, equity, or other factors. In this step, we simply want to know how much the two properties are worth, disregarding equity on the current home.
Here’s a simplified example…
- Departing Property Value: $2,000,000
- New Property Purchase Price: $1,500,000
- Combined Value of Both Properties: $3,500,000
Using these numbers, we can now calculate the combined debt for the new property and the old property.
- Existing Debt Loan on the Currently-Owned Home: $1,000,000
- New Loan Total: $2,500,000 ($1 million to pay off old home, $1.5 million for new)
- Total Loan-to-Value Ratio: 71% ($2.5 million Loan, $3.5 million Value)
- Required Down Payment: Roughly $180,000
In the above case, you would need a down payment that would move the combined loan-to-value ratio from 71% to 65%, which is the highest possible LTV you can have with our cross-collateralization loan. This means you would basically need to make a 6% down payment, or roughly $180,000.
But what if you have even more equity in your existing property? If your current equity is high enough, you can actually use cross collarteralization to secure a loan with no down payment. Let’s assume all the numbers above are the same, but instead of owning $1,000,000 on your current home, you only owe $750,000. In this case, the property values are the same ($3.5 million combined), but the loan balance is different:
- Existing Debt Loan on the Currently-Owned Home: $750,000
- New Loan Total: $2,250,000 ($0.75 million to pay off old home, $1.5 million for new)
- Total Loan-to-Value Ratio: 64.3% ($2.25 million Loan, $3.5 million Value)
- Required Down Payment: $0
The combined loan-to-value ratio is now 64.3%, which is a direct result of having more equity in the currently-owned home. As you can see, the higher the equity you have in your home, the less you will have to bring in a down payment. For this reason, cross collateralization is a beneficial tool for people with high equity, and it’s especially attractive to people who have completely paid off their current home.
2. Limited Down Payment Jumbo Loan
The next option to avoid selling your property before buying is to use a limited-down-payment jumbo loan. If you have a home in a high price range, you can work with San Diego Purchase Loans to secure financing for as little as 5% down. If we assume a purchase price of $1 million, this would mean you would only need $50,000 for a down payment.
This is a useful option for many borrowers because it allows for a recast, allowing the borrower to make a very high principle reduction, resulting in a substantial payment on the loan balance. This can reduce the loan amount significantly, and can reduce the monthly payment by a noticeable total. This is ideal for many borrowers because when the property sells, you will then be able to pay down the balance on the loan for the new property, which will lower your monthly payments.
3. Disregard the Debt on the Current Property
A third option is to entirely disregard the debt that still exists on the currently-owned property. This basically allows you to omit the debt payments, which will reduce your debt-to-income ratio, an important number for all mortgage loans.
Let’s say to make $16,000 a month and currently have a mortgage costing $4,000 monthly, which gives you a starting DTI of 25% (for simplicity, we’re disregarding other debts like credit cards, car payments, etc). You want to purchase a home that would also have a monthly mortgage of $4,000. Unfortunately, between purchasing the new and selling the old, you would have a DTI of 50%, meaning half your income is going to your two houses. This would likely result in rejection from most lenders.
However, if the lender disregards the debt on the old property, which will eventually disappear anyhow, you would simply qualify with your new mortgage payment alone, meaning you simply have a DTI of 25%, at least as far as the new loan is concerned. By eliminating the current debt from the equation, you essentially increase your income to qualify.
4. Bridge Loans
Another option that may be available is what’s known as a bridge loan. These are temporary loans with terms as long as a year, and they simply give you financing to make an offer on a new property without waiting for your current home to sell, “bridging” the time period.
These loans can be useful for purchasing a property before you buy, but they are also popular if you see any potential problems selling your current home. For example, you may need time to make your current home market-ready, but you can’t wait to purchase your next property because of a career move.
Let Us Help You Avoid Selling Your Property Before Buying
Is one of these options right for you? Contact San Diego Purchase Loans and we’ll help you find the right choice to avoid selling your property before buying a new home. Whether you are moving across the country or across town, we are here to make your move a little less stressful!
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