Reasons to Buy A Home Before You Sell
- Convenience. No need to move twice or store your furniture. No need to live through a time when your home is under construction for renovations. No need to live in a house while you are showing it.
- Move fast. Although the real estate market is slowing down, inventory is still low and desirable properties still go within days of listing. If you find a home, why wait? It may be gone in a month or two.
- Up-sizing, down-sizing, etc. Growing families need more room, empty-nesters need less room. Life is always changing. Adaption is the name of the game.
- Inheritance, divorce, relocating, etc. There are many unplanned events that may require you to change your housing situation.
Reasons To Use My Bundled-Services Program
- I have the experience as a longtime Real Estate and Independent Wholesale Mortgage Broker to lead you through the myriad of challenges that will occur with this complex coordination of transactions.
- As a dually-licensed RE/Mortgage Broker, I can create significant leverage with the cooperating Brokers in the transactions. I bring your deal to them. They agree to cooperate and to provide Broker concessions if they want to to participate in your deal. These concessions are redirected back to you through my capacity as your Mortgage Broker to lower your closing costs in the purchase of your new home. The total resulting cost for all my Bundled-Services is typically less than one single commission paid to one Broker. You come out the big winner in the end by saving thousands of dollars
- To fully understand your buying power, you will need to obtain a Pre-Approval Letter. Not just a Pre-Qualification Letter, but a bona-fide Pre-Approval Letter from an NMLS licensed Lender who runs a mortgage credit report and works with you to understand and develop your plan. This may include uploading some documents for a Partial or Full Doc verification of your income and liabilities.
- I will provide you with a bona-fide Pre-Approval Letter using the most efficient and secure methods of uploading your documents. I will take the time to analyze your best options, including alternative methods to calculate your income. You might be better positioned to use bank statements, 1099’s or P&L statements.
- I will help you determine if you should use an Equity-Tap method such as a HELOC or Stand-Alone 2nd, a Bridge Loan, or a PropTech company.
- I will also discuss the use of any Non-QM loan product that might make it easier to qualify. Perhaps you may choose to purchase your new home as an investment property. With consult from your Attorney and CPA, you may then plan to turn it into your Primary residence in the future.
Very Strong Equity Position
If you can check off all of these bulletpoints, you are fortunate enough to have the most affordable opportunity to buy a new home before you sell your current home:
- You own your current home outright.
- You have some savings and/or investment accounts.
- You have little or no debt including revolving credit card accounts.
- You have a FICO credit score greater than 760.
Then, for purposes of calculating your Debt-To-Income Ratio (DTI), your only monthly liabilities will be your TI = property taxes plus your home owner’s insurance.
Typically, your DTI limit for a conforming loan is 45%. Therefore, your buying power will be calculated as the sum of any approved mortgage amount designated on your Pre-Approval Letter plus your cash down payment.
Strong Equity But Some Liabilities
You will still have a strong equity position if you satisfy these bulletpoints:
- You have a mortgage on your home of less than 50% of its current value.
- You have some liquid assets for a down payment and reserves.
- Your FICO score is greater than 720.
This will position you to leverage the remaining equity in your current home with an Equity-Tap loan.
The caveat here is that the Debt-To-Income Ratio (DTI) is calculated as the sum of the following divided by your income:
- PITI (Principal, Interest, Taxes, & Insurance of your current mortgage).
- Principal and Interest (PI) of any additional Equity-Tap mortgage.
- PITI of the new mortgage on the new home.
- Any other liabilities (credit cards, student loans, etc.).
This cumulative ratio must be less than 45%. For most borrowers, this is not possible unless you have an exceptionally good income, few liabilities and you are requesting a limited Loan-To-Value (LTV) amount.
This is where my experience will help you the most. By reviewing your financial position, the different Equity-Tap, PropTech and Non-QM solutions, I can help you develop a good strategy. By using my Bundled-Services Program, you can save many thousands of dollars.
The Buy-Leg / What To Consider
- Have you found a home that you want to buy? Have you already submitted an offer? Does your offer have a sale-contingency clause, or a delayed-closing clause? Be aware that these clauses are red flags for the Seller, and your offer may be considered significantly weaker than another offer for all cash or 20% cash down plus an approved mortgage with no financing contingency.
- Are you looking in a specific geography for your new home? Out-of-state? I am licensed to help you find a replacement home in almost any state.
- What is your time frame for closing on your new home? For moving? For renovating, staging and listing your current home?
Have you already selected a Buyer’s Agent? Are they experienced enough to negotiate Seller’s Concessions, or a Temporary Buy–Down to help you lower your monthly payments? Do they understand the power of a Purchase Price Guarantee (PPG) to facilitate a “No–Contingency” purchase offer? Or a Bridge Loan to facilitate an all–cash offer to negotiate a lower purchase price? Will they give you some Broker concessions to help you with closing costs?
- Consider my Bundled-Services Program. I can give you a discounted PPG when most PropTech companies will charge you 1.5%-2.5% for this service. By using me as your Mortgage Broker and your Buyer’s Broker, I can dramatically lower your net costs by re-directing concessions and discounts to offset your Closing Costs.
The Finance-Leg / What To Consider
- If you have a 1st mortgage, how much equity do you have in your current home?
- If you plan to access that equity with a Stand-Alone 2nd or a HELOC, remember that you will have difficulty if your current home is listed for sale. It is best for you to set up your financing plan before you list your current home for sale. If it is already listed, you will still have the option to use a Bridge Loan. If you make an all–cash purchase offer, you may be able to negotiate a lower purchase price. With Delayed Financing, you then have up to 6 months to arrange a cash-out refi and pay off the Bridge Loan.
- Qualifying for a mortgage to purchase your new home will almost always involve evaluating your debt-to-income ratio (DTI). Be very careful not to over-leverage your debt before you try to qualify. Planning a good winning strategy is very important and may involve using a PropTech Company’s Purchase Price Guarantee (PPG). This will come with a fee and you will be limited in the amount of time that you have to renovate, stage, list and sell your current home. If you use my Bundled Services Program, I will help subsidize that fee.
The Sell-Leg / What To Consider
- Are you going to keep your current home as a rental income property, or sell it to pay off some or all of your new home purchase? If you are going to keep and rent it, you will want to evaluate your future rental income to determine your beneficial offset when calculating your Debt-To-Income Ratio (DTI) for your new mortgage.
- If you are going to sell it, how much time do you need? Do you want to move into your new home first? Then vacate, renovate, stage, list and sell your departing home? That will take a period of time, and you need to consider the housing payments for your departing home during that period.
- A HELOC, or home equity line of credit, works like a revolving credit card. You are only charged the Principal and Interest (PI) on the amount that you draw from the credit line. A HELOC typically has a lower interest rate than an unsecured credit card, but it will still be reported on your credit report as a liability, and still used to calculate your Debt-To-Income Ratio (DTI). You will not be able to get a HELOC if your home is listed for sale.
- A Stand Alone 2nd is a second position mortgage that will help you preserve your 1st position mortgage with its low interest rate, but the combined PI of both mortgages will be calculated into your DTI Ratio. You will not be able to get a Stand Alone 2nd if your home is listed for sale.
- A Bridge Loan is typically a short term mortgage loan that comes with a higher interest rate, but payments are often interest-only (IO) with a balloon at the end of the short term. You will be able to get a Bridge Loan if your home is listed for sale, but like a HELOC or 2nd, it will show up as a liability on your credit report that can often render you unable to become qualified for a new mortgage. It may be a valuable strategy to use a Bridge Loan to create an all-cash offer in order to win a reduced purchase price, and then use Delayed Financing to obtain a cash-out refi within 6 months to pay off the Bridge Loan.
- Power-Buyers like OpenDoor and OfferPad buy your current home quickly for all cash, but typically at a significantly discounted purchase price.
- Power-Lenders like Orchard, Knock, Homeward, Homelight and Trade-In Mortgage provide a “Purchase Price Guarantee” (PPG) on your current home which allows you to present a “non-contingent” offer for your new home, and significantly improve your ability to qualify for a new loan. However, they typically charge you 1.5%-2.5% of the purchase price. In many cases, I can provide you this service for free.
- The PPG evolved from Fannie Mae’s Selling Guide (Chapter B3-6-06) that essentially states: Fannie Mae will not require PITI debt on the current house to be included in the DTI ratio to qualify for a new purchase loan if the following documentation is provided:
1). a fully executed sales contract for the current residence, and
2). confirmation that any financing contingencies have been cleared.
- PPGs also allow the borrower to exclude HELOCs, stand-alone 2nds, and bridge loans from the new loan DTI Ratio calculations. The PPG has become a very useful and valuable tool in any Buy Before You Sell program.
- In many cases, the Non-QM loan qualification guidelines, albeit a little more pricy, provide more flexibility than qualified mortgage (QM) guidelines. Bank statement loans resemble the Alt-A loans of yesteryear. 1099 and P&L income documentation can significantly boost a your buying power beyond what W-2 and income tax documentation can provide.
- DSCR loans are particularly popular because they allow income-qualification based not on your income, but on the proposed rental income of the house. These are not non-recourse loans, and they do require your personal guarantee. However, they may be vested in an LLC, and there is flexibility when calculating the debt-service-coverage-ratio (DSCR), even if the proposed rent does not cover the PITI.
- Asset-based lending is geared to today’s Baby Boomers who have accumulated wealth and equity through the recent appreciation of their homes, investments and retirement accounts. These folks may chose to live on their investments without any W-2 income. Their monthly qualifying income will be calculated as a fraction of their net worth, which varies according to the loan program. Some Non-QM Lenders will mix-and-match passive and active income streams and include Asset-based income into the borrower’s qualifications.
Recasting and Delayed Financing
Many if not most Lenders, especially with conventional loans, will “Re-Cast” your new loan for only a few hundred dollars once you have sold your departing home.
A Loan recast will allow you to make a large payment toward the principal of your new loan after you sell your departing home. The Lender will recalculate your mortgage payment based on the reduced balance. This will lower your monthly payments without any additional closing costs or changes to your loan terms.
This technique is not a re-finance. It only lowers your monthly payment. If interest rates go down enough in 2024 or 2025 to make sense, you may then re-finance to change the rate and terms.
Delayed Financing is a technique to help you negotiate a discounted purchase price. It makes sense if you have timing issues, or if the Seller is willing to make a significant price reduction for all–cash. If necessary, you can use a Bridge Loan to make the all–cash offer, and then obtain a cash-out refi within 6 months using Delayed Financing to pay off the Bridge Loan.
Vashon Mortgage – NMLS #2431410 & Collen & Associates CA DRE #01452367
(c) 2022 – All rights reserved
Randal Collen MLO #2386273 & DRE #01452367