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Most
people would prefer to sell their old house
and buy their new house on the same day. But
it's not always possible to time the closing
of the sale and the closing of the purchase
within minutes of each other. When moving in
the same geographic area, nine times out of
10 you see the closing dates coincide with
each other. Sellers and buyers usually
coordinate with real estate agents so the dates
do coincide and all parties are happy.
Sometimes, though, the dates don't coincide, despite
everyone’s best efforts. There are two types
of poor timing, and ways to cope with both.
First, a gap in ownership occurs when you have to
sell your old house a few weeks or months before
you buy your new one. Second, an overlap in ownership
happens when you buy your new house before closing
on the sale of the old one, forcing you to pay two
mortgages for a while. A gap in ownership is
the simpler problem to deal with.
The most common approach would be to rent back the
property from the new owner. Typically, your
monthly payment would be the same as the new
owner's mortgage payment. Staying in the
house and renting it from the new owner is the
least expensive and most convenient way to deal
with the ownership gap because you have to pack
your stuff and move it only once, without having
to pay to store it somewhere and move it twice. You
don’t want to eat up your profit in moving costs
meaning two moves and storage costs and interim
rental or hotel costs.
An ownership gap can be a logistical hassle and can
erode the profit you make from the sale of your
home. An overlap, in which you close on your
new home before you close the sale on your old
home, can cause aggravation, too. Your lender
might not even allow you to do it. If you
have overlapping mortgages, you have to qualify
for the combined monthly payments as if they
were one big home loan even if the overlap period
is just a week. Let's say your lender determines
that you can handle a maximum mortgage payment
of $2,200 a month. If you are paying $1,000 a
month on your current house, and the payment
on your new house would be $1,500 a month, the
lender won’t let you take out that second loan
because you can’t afford $2,500 in mortgage payments.
You’ll have to wait until you close the sale
on the old house.
There are ways to get out of this trap. One way is
to get a no-ratio mortgage, in which you don’t
state your income but you verify your employment
and assets. The rate would be higher than for
a conventional mortgage, but you could refinance
later.
A bridge loan is another method of swinging two payments.
A bridge loan takes into account the fact that
somebody needs money for a short amount of time
to bridge the two closings. A bridge
loan is backed by the equity in your old house.
Typically, it is available only if someone has
signed a contract to buy the old house. Rates
on bridge loans often are the prime rate plus
2 percentage points. If you use a bridge
loan, you end up with three loans the bridge
loan and mortgages on two houses. But the bridge
loan acts as your down payment. It reduces the
loan amount and thus the monthly payment for
the new home, and that might be enough to let
you qualify for the mortgage. In lieu of getting
a bridge loan, you could make a down payment
by drawing on a home equity line of credit on
the old house. Rates on equity lines of credit
tend to run more than a point lower than rates
on bridge loans and you usually don’t have to
pay closing fees.
The purpose is to stimulate thought for our clients and those
professionals we network with. One should consult
with a qualified mortgage professional prior
to implementing any mortgage planning strategies. If
you are an estate planning, insurance, real
estate or financial planning professional receiving
this newsletter, please call our office and
introduce yourself to us. We are always
seeking to grow our referral network and expose
more service professionals to our client base. |
