Sometimes closing the sale on the old house and the purchase of
a new one just don't jibe. Here's how to handle overlapping
mortgages or a gap in between houses.
By
Holden Lewis, Bankrate.com
Given their druthers,
most people would 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," says
James Mason, director of sales for Internet lender MortgageIT.
"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.
When you're in-between houses
A gap in ownership is the simpler problem to deal with. You
might confront an ownership gap for various reasons. Perhaps you
have sold your house and moved across the country and want to
familiarize yourself with your new hometown before buying a
house. Or maybe construction of your brand-new house has fallen
behind schedule, past the closing date on the sale of your old
house.
"The most common approach," says Dave Herpers, director of
consumer affairs for mortgage lender Amerisave, "would be to
rent back the property from the new owner." Typically, he says,
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
cheapest 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.
A shrewd seller will anticipate the ownership gap problem and
accept an offer from a seller who is flexible about the move-in
date. Even if that offer is for a little less money, it might
save money in the long run.
If you can't stay in your house while you rent it, you'll have
to move in with friends or relatives, or rent a place for a
while.
"You don't want to eat up your profit in moving costs -- meaning
two moves -- and storage costs and interim rental or hotel
costs," says Ellen Bitton, president of New York-based Park
Avenue Mortgage.
The pain of two mortgages
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 it were one big home loan --
even if the overlap period is just a week, Herpers says.
To qualify for a loan, your mortgage payment and total debts
must not exceed certain percentages of your income (the exact
percentages vary, based on your credit score and other factors).
Those percentages are called the mortgage and debt ratios or
front-end and back-end ratios. Whatever a lender calls them, "If
you exceed the ratios, you will get declined for your new loan
request," Herpers says.
Let's say your lender looks at your ratios and 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. If you have a good credit
history, you might be able to qualify for a no-ratio mortgage.
The rate would be higher than for a conventional mortgage, but
you could refinance later.
Building a bridge
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,"
Bitton says. 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. But you might pay a penalty fee if you sell
the house less than a year after taking out the line of credit.
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