Are you a current homeowner who needs to buy another house? You might be wondering whether you should sell your current home first or purchase your next home with a new mortgage. It is possible, however, that there are some things about finances and qualifications that you must take into account.
Be it because of your family’s expansion, a job move, or simply a change of environment, knowing how to manage two mortgages will help you save money and avoid problems.
Why Do Homeowners Buy Before Selling?
In a highly competitive real estate market, it often makes sense to buy a new home without waiting to sell your current one. Otherwise, you risk missing out on the home you really want. Sellers who have already selected their next home tend to have an advantage during negotiations and face fewer time constraints. In addition, moving directly from one home to another can help you avoid paying rent and the hassle of moving twice.
However, carrying two mortgages at the same time, even for a short period, is a significant financial responsibility, and banks take this into account when assessing your creditworthiness. Understanding the requirements in advance can give you a valuable advantage.
Key Considerations Lenders Make When You Have an Existing Home
- Debt-to-Income Ratio (DTI)
The debt-to-income (DTI) ratio is among the most important ratios that lenders look into when considering your new mortgage application. DTI measures the ratio between all of your existing debts and the expected new mortgage payment against your total monthly gross income. Normally, conventional mortgages must have a DTI of 45% or lower. However, in some cases, lenders accept higher ratios up to 50% with compensating factors such as high credit scores or savings account balances.
Lenders may consider the potential rental income from your current property to help offset the mortgage payment on that property, which may improve your debt-to-income (DTI) ratio.
- Credit Score Requirement
A good credit score is very important when applying for a mortgage, especially if you already have a mortgage on your current home. Most conventional lenders require a minimum credit score of 620. However, to qualify for the most competitive interest rates, a score of 740 or higher is generally preferred.
It is good to rectify one’s credit status before applying for a second mortgage.
- Equity and Cash Savings in Current Home
Equity in your current house may help you in many ways. First, it will be viewed by lenders as a cushion in case of problems. Second, the existence of equity in your current home will provide you with such opportunities as a Home Equity Line of Credit (HELOC) or a bridge loan, and both these financial instruments can finance your down payment before your current home is sold.
Having savings to cover two mortgages for at least several months will also be good for underwriters.
Types of Finance to Look into
Bridge Loans
A bridge loan is a type of financing that helps “bridge” the gap between buying a new home and selling your current one. These loans typically have terms ranging from six to twelve months and are secured by the equity in your existing home. A bridge loan can provide funds for the down payment on a new property before your current home is sold. While bridge loans generally carry higher interest rates than traditional mortgages, they offer flexibility and quick access to funds.
Home Equity Line of Credit (HELOC)
If you have built up significant equity in your current home, a Home Equity Line of Credit (HELOC) allows you to borrow against that equity up to an approved credit limit. Many homeowners use a HELOC to fund the down payment on a new home without liquidating other assets. However, it is important to note that most lenders will not approve a HELOC if your home is already listed for sale.
Offers Based on Purchase Contingency
There’s yet another way of making an offer by saying that it will be contingent on the sale of your existing house, thereby avoiding any possibility of having two houses at once. But in a seller’s market, there’s little interest in offers based on contingencies for sellers who would want nothing but straightforward buyers.
Mortgage Application Process When Currently Owning a Home
- Calculate your DTI Ratio: Add up all your monthly debt obligations, including your mortgage payments and other debts, then compare the total to your gross monthly income.
- Review Your Credit Report: Check your credit report for any errors and resolve any outstanding disputes before applying for a mortgage.
- Assess Your Home Equity: Evaluate the amount of equity you have in your current home to determine whether a HELOC or bridge loan may be a suitable option.
- Get Pre-Approved: Obtaining mortgage pre-approval from a trusted lender such as Reliance Financial demonstrates that you are a serious buyer and helps you establish a realistic budget.
- Consult a Loan Officer: An experienced loan officer can guide you through your financing options and help you secure the most competitive interest rate available.
Risks to Consider
Owning two mortgages at once comes with its own set of risks. If you find that it will take you longer than expected to sell your home, you will be forced to deal with months of paying two mortgages, which can result in stress due to added pressure on your finances. It is important to know how well your local real estate market is doing and how much time it will take you to sell your home before considering making a move.
How Reliance Financial Can Help
At Reliance Financial, we help homeowners navigate complex mortgage situations with confidence. Our experienced loan officers provide personalized guidance tailored to your unique circumstances, whether you need assistance evaluating your debt-to-income ratio, exploring bridge loan options, or determining the best financing strategy for your next home purchase. We also help you secure a competitive interest rate by offering mortgage solutions from a variety of lenders, allowing you to compare options and choose the one that best fits your needs.
Reliance Financial proudly serves borrowers in California, Texas, Florida, Colorado, Michigan, Virginia, and Washington. Our 5-star-rated team is ready to provide the support and expertise you need throughout your home financing journey.
Conclusion
Taking out a new mortgage before selling your current home is certainly possible with proper planning and preparation. Understanding your debt-to-income (DTI) ratio, credit score, available home equity, and financing options can help you make informed decisions throughout the process.
At Reliance Financial, we are committed to guiding you every step of the way, helping you navigate your financing options and move closer to purchasing your ideal home.
Frequently Asked Questions
Can I get a new mortgage when I already have one?
Yes, as long as you maintain a DTI ratio within the lender’s limit. It will definitely increase your chances of being approved if you have good credit scores and reserves.
What should my DTI ratio be for having two mortgages?
Most lenders prefer a debt-to-income (DTI) ratio of 45% or less. However, some lenders may allow a DTI ratio of up to 50% if the borrower has compensating factors, such as a strong credit score, substantial cash reserves, or other positive financial characteristics.
Is there any chance that the rental income from my existing home will help in my application?
Yes. The rental income from your home will help in reducing your existing mortgage payments, up to 75%.
What is a bridge loan, and how does it function?
A bridge loan is temporary financing taken out against the equity in your present home. This loan allows you to pay your down payment on your new purchase until your current property is sold.
For how long can I have two mortgages simultaneously?
There is generally no strict maximum term for a bridge loan. However, most bridge loans are designed as short-term financing solutions and typically have repayment periods ranging from six to twelve months. The exact term will depend on your financial situation, cash flow, and local market conditions, including how quickly your current home is expected to sell.
Do I need to be pre-approved before putting my present house on the market?
Yes, you should definitely do so because it helps you understand your budget and gives you an edge over others when making an offer.
