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If you want to buy a house before you sell your first home, you may find it difficult to qualify for a mortgage before selling your house. Lenders get nervous at the thought of a borrower balancing two mortgage loans and are less likely to approve a second mortgage, unless the borrower is in a really strong financial position.
Keep reading to understand the challenges of securing a second mortgage and what your options are for financing a new home before selling your existing one.
How having a mortgage impacts new mortgage eligibility
When you apply for a second mortgage (even if you don’t plan to keep your first mortgage for much longer), lenders will look at the same qualification factors as they did when you applied for your first mortgage. Let’s take a look at how an existing mortgage impacts those qualification factors.
Total monthly housing payment
When a mortgage lender examines your monthly income and debts, they do so to determine how much you can afford to make in monthly mortgage payments. Lenders will also take your monthly bills into account to make sure you can handle the addition of a mortgage payment.
Generally, lenders want to see that your total monthly housing payment (principal, interest, taxes and insurance) doesn’t surpass 28% of your gross monthly income. When you have two mortgages, it is going to be much harder to stay within that 28% limit and less likely a lender will approve you for a second mortgage.
Your debt and credit score
As they always do, mortgage lenders will take your current debt amounts and credit score into account when they evaluate your mortgage loan eligibility. When you have an existing mortgage, your debt-to-income ratios are going to be on the higher side, which negatively impacts your credit score and makes it harder to qualify for a mortgage. If you have a strong credit score (740 or higher), some lenders will overlook a high debt-to-income ratio. Ideally, you’ll have a debt-to-income ratio of 45% or lower.
To calculate your debt-to-income ratio, divide the amount of all debt you have by your income and then multiply that number by 100. Getting a mortgage with existing debt is hard, so it’s helpful to pay down as much debt (any debt, not just mortgage debt) as possible before you apply for a new mortgage loan.
Shouldn’t lenders understand that you’re about to sell your old house?
If you plan to sell a home, it seems like a bank or mortgage lender would understand your need for a second mortgage. Unfortunately, most banks and lenders don’t like to approve mortgages if the borrower will need to cover two mortgages at the same time, no matter how temporary the borrower believes that doubling up period will be. It’s understandable why lenders get nervous here. Houses can sit on the market for months, there’s no guarantee your home will sell soon, and juggling two mortgages can lead to financial strain.
Do the math before you shop
That being said, before you shop for a second mortgage, do the math on whether or not you can truly afford to carry two mortgages. Having an existing mortgage doesn’t automatically disqualify you in the eyes of lenders. If you can prove that you can afford a second mortgage and all of the costs that come with homeownership — such as property taxes, homeowners insurance, and maintenance — then they’ll be more likely to issue you a second mortgage.
3 potential double mortgage solutions
Your plan is likely to sell your first home, use the proceeds to pay off the mortgage on the first home, and then put any money left over from the first home sale towards the purchase of your new home. This is often a tricky timeline to line up. If a second mortgage is a must while you balance the sale of your current home with the purchase of your next home, there are some steps you can take to secure financing.
Secure a down payment
In order to qualify for a mortgage loan, you need to make a down payment on the second home. For some it will be difficult to source a down payment before they sell the first home and have cash from the sale in hand.
If you don’t have enough savings to pull together a down payment, consider the following solutions:
- Home equity line of credit. Because you still have your first mortgage, you can access a home equity line of credit (HELOC), which allows you to draw cash from the line of credit (similar to a credit card) as needed up to your available limit. If your limit is high enough, you can borrow the money to make your down payment on a new home. You must have a HELOC in place before you put up your home for sale in order to pull this move off. Your mortgage lender won’t approve a HELOC if your home is already on the market.
- Bridge loan. A bridge loan makes it so you can borrow up to 80% of your home's value to pay off your first mortgage and put money towards a down payment on a new home or you can use the bridge loan just to make the down payment. With a bridge loan, you will make interest-only payments on the loan and you typically only have a year to pay everything back, so you need to be confident you’ll sell your home or can otherwise pay off this loan. Because the term on a bridge loan is so short, you’re likely to pay a higher interest rate than you would on a mortgage loan.
It’s hard to qualify for any traditional mortgage if you don’t have enough saved for a solid down payment. If you can’t pull together a good down payment because your savings are tied up in your first home, you can consider a low-down-payment conventional mortgage for your second mortgage. Once you sell your first home, you can take the proceeds and put them towards your new home, that way you can get your mortgage recast.
When you recast a mortgage loan, you give the lender a lump-sum payment to put towards the principal. The lender will then reset the amortization schedule (which outlines how much of each of your payments will go towards the principal and interest). When you recast your mortgage, your monthly payments will lower. This is a much simpler and more affordable alternative to refinancing your mortgage. Not all lenders offer mortgage recasting (FHA, USDA, and VA loans aren’t eligible), so if this is something you want to pursue, you need to choose a lender that offers recasting services.
Work with a company like Orchard
Orchard helps homeowners unlock the equity in the home they want to sell, so they can instantly access up to 90% of their home’s value upfront. With Orchard, you can unlock your equity before you even list, which makes it possible to make an offer on a new home without having to sell your existing home first. You can even turn your offer into an all-cash offer.
Getting your next mortgage before you close out your old one is undoubtedly a hassle. A new-era option like Orchard is a good bet for handling this dilemma. Otherwise, you may be doing a lot of complex planning, spending a ton on high-interest loans — or both.