Move-Up / Move Down Buyer Planning Tip:
Determine if You Qualify to Buy First, Before You Sell
Of course it is better to buy first before you sell. It saves you the hassle of an extra move and short-term rentals. And it gives you the opportunity to vacate, update, and stage your existing home before selling it for top dollar.
How do you finance that purchase? Here are 3 important elements to consider: Your down payment, mortgage (and debt-to-income ratio), and tax consequences.
Here are some options, and the pros & cons of each:
Option #1. Conventional purchase loan - This is the least expensive option if you have ready down payment, and sufficient income to qualify to carry two mortgages. We Abundance offer jumbo and super jumbo loans that require as little as 11% down payment, without the expensive private mortgage insurance (PMI).
Option #2. Home Equity Line of Credit (HELOC) - This is a good option if you have sufficient equity in your existing home; if you have a good, low interest rate first mortgage; and if the monthly HELOC payments would not affect your "debt-to-income" (DTI) ratio for your new home purchase loan. Keep in mind that HELOC generally have a lower loan-to-value (LTV); and carry a higher and adjustable interest rate than a conventional home loan. Interest paid on a HELOC may not be tax deductible. Consult with your CPA or tax advisor.
Option #3. Cash-out re-fi from your existing home for the down payment on your new home - This is a good option if you plan to keep both the existing home and the new home for a few years (e.g., keeping the existing home as a rental). When you do a cash-out re-fi, you can potentially get a low, 30-yr fixed rate mortgage, or an adjustable rate mortgage (ARM) if you don't plan to keep your existing home for more than 7 or 10 years. We recommend that you get pre-approved with Abundance for both loans first, before you pull the trigger on the cash-out re-fi. You don't want to risk your chances of qualifying for a bigger loan for your dream home.
Option #4. Abundance Bridge Loans - This is a nice solution for people with significant equity in their existing home or other real estate. Equity-based, Abundance Bridge Loan has no debt-to-income (DTI) ratio requirements. Using both the existing home and your new home as loan collateral, you may be able to borrow the entire purchase price of your new home, without any out-of-pocket down payment.
Once you sell your existing home, you can pay down your bridge loan, and then re-finance the balance to a conventional home mortgage. If you time it well, you may only need the bridge loan for 5 to 8 weeks. There is no pre-payment penalty.
Affluent borrowers and their financial advisors often prefer bridge financing to selling their much appreciated stock holdings for the down payment. This saves them from the 30%+ capital gains tax when they only need the funds for the short 2 to 3 months that they carry two homes.
Get pre-approved for Abundance Bridge Loan so you can submit offers with financing or appraisal contingency in this competitive market.
Option #5. Margin loan or securities-based lines of credit - This is a viable option if you have a sizeable brokerage account, and can tap into it for your down payment on the new home, or in lieu of a home loan. The loan amount is typically capped at 50% of your asset value. Should the market value of the pledged collateral decrease, the bank may demand immediate repayment of outstanding obligations or require you to deposit additional cash or securities to the pledged brokerage account in order to avoid the sale of pledged assets. Hence, this is considered high risk, and should not be used to hold long-term asset such as your home. The interest rate is usually variable. Interest paid on your margin loan or securities based lines of credit may not be tax deductible. Consult your CPA or tax advisor.
Option #6. Your IRA or retirement account - Yes, you can identify your 401K or IRA as reserves for your loan qualification, but we Abundance do not recommend using your retirement accounts for your down payment, unless you have high confidence that you can re-pay these loans very quickly (under 3 to 5 months). You want your retirement assets to continue to grow, tax deferred, while you sleep. Plus, retirement accounts are generally protected from bankruptcy in case of a financial disaster. Protect your retirement.
Want even more options? Yes, there are other options, such as borrowing the down payment from family, or buying with another family member. If you are a veteran, the VA loan is a great option.
Get pre-approved with Abundance, so you will have the peace of mind to make a compelling offer in this competitive market.