How to Bridge the Gap Between Mortgages Part I
So, you’d like to buy a second house that will become your new primary residence. You’ve been house hunting and have found the perfect home, but you’re not pre-approved, nor is your current home under contact for sale or even on the market. What do you do?
Believe it or not, this is a very common scenario for many of our borrowers. Over the next couple weeks, we will go over the guidelines and share some strategies to help you bridge the gap between mortgages.
First let’s start with the guidelines. As you would expect, each type of home loan, (FHA, VA, conventional), have their own guidelines when it comes to retaining your current home through the purchase of your new home, and how equity can be extracted from your current home to be used as a down payment on your new home. However, they are all very similar.
First, if you choose to retain your current home through the purchase of your new home, your income will need to support both monthly mortgage payments, as well the minimum payments of your other credit obligations. Monthly mortgage payments include all property taxes, insurances and association dues, if applicable.
Second, assuming your income supports the new purchase and loan amount, you will likely need to show your lender financial reserves. What is a financial reserve? A financial reserve is a liquid (checking, savings, money market), or near liquid (investment accounts, bonds) asset that is available to the borrower after the mortgage closes. Fannie Mae, Freddie Mac, FHA, and VA, no longer publish specific amounts of reserves that borrowers need to retain, however, it is safe to assume the more the better.
And third, is your intent. Loan officers and underwriters are trained heavily on how to sniff out potential mortgage fraud. So, if you apply for a mortgage for a new primary residence, it better be your new primary residence.
To document your intent, lenders request that borrowers draft a letter that details their intent to occupy the new home (sell or rent their existing home), and state a reason or two why they are moving to the new home.
Some of the most common reasons include larger home/expanding family, smaller home/decreasing family, closer to your employer, or a better school district. Whatever the reason, you will be asked to put it in writing.
Once you have determined that you meet all the guidelines, you are now ready to be pre-approved. In the next post, we will discuss down payment options and introduce the little known, and under-utilized concept of recasting your mortgage.
Have a question? Leave a comment below or send us a message and we’ll get back with you!