Buying a home is challenging enough. Buying one while selling the home you’re still living in? That’s even more of a challenge. Unless you’re able to sell your existing home before making an offer on what you hope will become your new one, you might need a high enough income to prequalify for two mortgage payments a month. If you don’t make this much money, you might lose your potential dream home to other buyers.
It’s long been a challenge for homeowners who are selling a residence while looking for a new home at the same time: How do they handle their existing mortgage when applying for a new home loan?
Usually, borrowers will qualify for their new loan contingent on the sale of their current one. This means that their lender won’t release the mortgage funds they need to buy a new home until the borrowers sell their existing residence.
Homeowners will then have to make what is known as a contingency offer on the residence they want to buy. The contingency will state that these buyers won’t be able to close the sale until their own property sells. This can be a tough sell in strong real estate markets: Sellers might receive other offers from buyers who can purchase their homes immediately. Most sellers will take these offers instead of one with a contingency attached.
The debt-to-income ratio challenge
"In today's market, you are seeing more and more clients buying homes before selling their own home," said David Hosterman, branch manager with Greenwood Village, Colorado-based Castle & Cook Mortgage. "From a lender's perspective, a client must be able to qualify based on standard debt-to-income requirements."
It’s that debt-to-income ratio that makes life so difficult for buyers who are also selling a home. In fact, lenders will tell you that debts matter more than you credit score when it comes to qualifying for a mortgage.
Lenders today want to work with borrows whose total monthly debts – including current and estimated future mortgage payments – equal no more than 43 percent of their gross monthly income.
If buyers who are already paying an existing mortgage want to make an offer on a new home without adding a contingency, they’ll have to earn enough income each month so that taking on two mortgage payments at once won’t push them past that 43 percent debt-to-income level.
Yes, you can tell lenders that you are trying to sell your home. But you can’t offer any guarantees to them on when you’ll close that sale. This means that you might face several months of having to make two mortgage payments. If your lender doesn’t think you can handle any months of making two payments, it won’t approve you for a loan.
There is relief for those homeowners who have found a buyer for their home even if that sale hasn't yet closed when they need to make an offer on their new residence. Hillary Legrain, vice president with Bethesda, Maryland-based First Savings Mortgage Corporation, said that those buyers who have a ratified contract for the sale of their home can qualify for a new mortgage without having to factor in their currently monthly mortgage payments.
That's because lenders can see that these borrowers will be unloading their current residence before having to make the mortgage payments on their new home.
But those homeowners who haven’t yet secured such a contractor who maybe haven’t even had any offers on their home? They have limited choices.
Carrying two mortgages at once
Buyers who have enough income can carry two mortgage payments at once if they still meet the debt-to-income ratios required by their lenders.
For instance, if the total of both of your mortgage payments – your current one and estimated new one – will come out to $3,000 a month, your other monthly expenses equal $1,000, your lender will consider your monthly debts to be $4,000. If you have a gross monthly income – your income before taxes are taken out – of $10,000, your debt-to-income ratio will be 40 percent, just under the 43 percent that many lenders use as a guideline today.
You, then, might be able to qualify for two mortgages at once, if your credit score and job status are also strong. But if your income isn’t high enough? Then it’s time to think about a contingency offer.
The contingency offer
Many consumers have to make a contingency offer when they are trying to unload a home while buying one at the same time.
Joey Birkle, a senior loan officer with First Option Mortgage in Indianapolis, says that when buyers making a contingency offer, they don't have to factor in their current mortgage payments when applying for their new mortgage loan. Lenders will only count their estimated new mortgage payments when calculating the borrowers' debt-to-income ratios.
"Basically, the contingency means their current home has to sell before they can buy the new home," Birkle said. "The buyer will not purchase the new home until the current home sells. Therefore, the buyer doesn't have to qualify carrying two mortgages."
This does increase the risk that borrowers will lose out on the homes they want to buy. Many sellers won’t accept contingency offers. And those who do, can still sell their residences to other buyers even if they have accepted a contingent offer.
A typical contingency offer will come with two key stipulations: First, they usually come with a date by which buyers have to sell their homes. If they don't sell their homes by then, the contingency offer is terminated. Second, sellers have the right to market their home to other buyers. If they receive an offer from another buyer, they have to notify the first buyer. That buyer then has the option to remove the contingency and purchase the home immediately or simply terminate their offer.
Selling first, then buying
If consumers find the new home they want to buy too soon, they can greatly increase the challenge of successfully bringing a contingent offer to closing. After all, it can take a long time to sell a home, and the contingency offer might expire before buyers find the right offer for their residence.
"Borrowers tend to begin searching for a replacement home immediately when they put their current home on the market," said Tanvir Karim, branch manager with Banc of California in Newport Beach, California. "More times than not, they will find a property they want to purchase prior to even receiving offers on their current residence."
This is why some homeowners first sell their homes before they even begin looking for a new one. This does present its own challenges: Buyers will have to find somewhere to live on a temporary basis, usually renting an apartment until they find their new home. These buyers will also have to schedule two moves – one to move their stuff into an apartment and, probably, temporary storage, and a second to move into their new home.