Buying a new house before selling - money options
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Anonymous
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My husband and I are planning to buy a bigger home. We already own a home and have quite a bit of equity in it (around 160k). We were initially going to sell our home first and then buy, but we would really like to find a house that suits our needs (child has a disability - need a house that will have certain features), and when we do, we need to act. Problem is that we need our equity for the downpayment on the next house. Our current home should sell relatively quickly (it's in a relatively desirable neighborhood. houses don't tend to stay on the market very long).
The way we see it, we have three options, but each have their downsides. 1. Borrow from our TSPs. Husband and I can borrow 50k each. We could borrow, put a no contingent offer down when we find out the house we want, and then try to sell our house immediately, and then repay the loan immediately. We know the whole pretax, post tax dollar issue, but it's an option. 2. Get a home equity loan from a bank. Not terribly desirable since we would have to pay interest on it, and it will count towards our debt to income ratio, but banks won't bat an eye twice. 3. Get a home equity loan from a relative. We have the means to do this. It is very desirable since we wouldn't have to pay interest. The problem is how banks will treat it based on debt to income ratio, or if they will give us a hard time about it. Anyone have any insight? We want to make this as seamless as possible, completely recognizing that this will be hard! |
Anonymous
| We did exactly this - bought before we sold in a market where houses tend to move quickly. When we purchased our second home, we did an 80-10-10 mortgage (10 percent down, 10 percent HELOC, 80 mortgage) with our lender and paid off the 10 percent HELOC immediately when we closed on our first home a month later, so that we now just have one mortgage. |
Anonymous
| Bridge loan, but you need to have quite a bit of equity. Also, banks will not issue equity loans if they know you've moved out of the house, so be aware of that. |
Anonymous
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I did option 2. Got a home equity line and paid it off when the first property sold.
Just something to bear in mind: our first house was in a desirable neighborhood so we didn't anticipate any problem selling. As it turned out, their home inspection found termite damage which we were unaware of, and the deal fell through. 4 months later, after $18 K spent on remediation, and several months of carrying two mortgages, it all went through. We were fine but it was a little stressful. make sure you have enough cash to cover any eventualities. |
Anonymous
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We're actually kind of in a similar situation and wanted to post asking about it.
When you say that banks won't bat an eye for option 2, the home equity loan, does that include when you're shopping for mortgages for the new home? One of my concerns is taking a loan out on the old house shortly before shopping for one for the new home. ie the hit on your credit, debt to loan ratio, etc. |
Anonymous
The HELOC is on the new home, not the old one. |
Anonymous
| Just wondering as a general matter: when you borrow from your TSPs, does the monthly payback amount count as debt in the DTI equation? You're essentially borrowing from yourself, but I'm not sure. |
Anonymous
I am not sure how you get a HELOC on a house you do not own yet. It sounds like OP needs the equity for the entire downpayment, not just 10%. A different poster made a HELOC part of the financing package (the 80-10-10) but I am not so sure how common that is, in any event that poster had 10% liquid at the time of purchase. |
Anonymous
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Borrowing from your TSP is a great option. Negligible fees, the interest you pay goes to yourself, and beyond documenting that the money comes from your own retirement account, it won't count towards your debt to income ratio.
I have twice borrowed from my retirement accounts to facilitate house purchases. You are misinformed about there being a pre-tax/post-tax issue. You borrow $X, you pay back $X, there is no additional tax burden. To see this easily, imagine that you borrowed $50K, cashed the check, and then immediately transferred the $50K back to the TSP to repay the loan. Clearly, there are no additional taxes. It is no different if you repay the loan after a few months. |
Anonymous
Previous poster from 14:51 again. Oooh okay. I did that before but for some reason thought that the rules were more strict now and this option wasn't available anymore. Good to know. I was originally thinking about looking into loans that would have a recast option and recast the loan after selling the other house. But this option might work better. Thanks for the tip! To the poster from 22:53, process wise everything is like a mortgage. Where when we did it before, our mortgage lender was the one that found the HELOC for us and we signed all the paperwork for both loans at closing. At the time it was one of the ways to get around PMI if you were putting less then 20% down. I thought after the housing meltdown they weren't allowing this anymore but maybe they are. Will have to look into it. I think you might be right I'm not sure if they'd let you end up taking a HELOC that results in the home being 100% financed. But never really looked into that before. |
Anonymous
| I second a bridge loan |
Anonymous
The difference is that the $50K taken from the TSP was pre-tax. After a few months you are paying back with post-tax dollars. So that $50K paid back could have been $75K if it went straight to TSP out of your paycheck. |
Anonymous
Are those still available? I thought they were hard to get since the housing crash. |
Anonymous
| Keep in mind, that no matter which way you slice it. Or how you borrow for the downpayment if you are closing on your new home prior to selling your old, you will have to qualify to carry ALL mortgage debt. The bank always calculates the worst case scenario, which is no not being able to aell the old house. |
Anonymous
| We were just in a similar position except we were able to afford a 10% down payment without selling our former house first. As soon as our offer on the new house was accepted, we got busy preparing our former house for sale. We were very lucky that we only ended up owning both houses for two weeks. As soon as our former house sold, we used the "profit" to pay off the second 10% loan. Good luck! |