Buying a new home with poor timing [08/16/2003]

By William Kugel

One of the realities that I have often observed is that many borrowers find themselves applying for a mortgage in situations where their timing or circumstances are less than ideal. Several examples come readily to mind such as finding the home you want to buy before you have your present home sold or before you or your spouse can line up employment when relocating. In this article, I will help you explore the options, understand the qualifying process, and offer some tips on how to navigate through these uncertain situations.In fast-paced markets, such as the one we've been in, a certain percentage of deals are termed "move up" purchases. This occurs when someone who already owns a home is purchasing another. In the same vein, a "move down" purchase occurs when someone is changing lifestyles or downsizing after children are grown and move out of the nest. In both cases, the challenge may be timing the purchase of one and the sale of the other in such a way as to work out both the logistics of a smooth move and the ability to qualify for new financing. Sometimes everything falls into place. You hope your present home can sell first or that the seller of your new home will accept an offer contingent on the sale of your old home. But, sometimes the property you want is so desirable that a contingent offer will not succeed.Another example of trying to apply for a mortgage where the timing creates a challenge is the couple who relocates to an area for a new job opportunity for one spouse while the other is unable to land a job with the same neat timing. The mortgage industry refers to this circumstance as the "trailing spouse." In the other example above we could think of it as the "trailing sale." In either case there is the common problem of qualifying with unusually high debt-to-income ratios. In the case of the trailing sale there is the added problem of not having access to the equity in your home from its sale in time to use it toward the purchase of your next home. If you find yourself challenged by problems like these, here are some suggestions that may help you overcome the obstacles involved:1. Get pre-approved ahead of time. If you expect to face a scenario that involves purchasing a home when you already own one or circumstances that place extraordinary strain on your qualifying, I strongly recommend that you begin the pre-approval process well in advance of making any offers or even listing your home for sale. There are many risks in these scenarios so it is important to plan ahead for all contingencies. A pre-approval, properly executed, can lay the groundwork for stepping out in what otherwise could be dangerous waters. 2. Understand the impact of your circumstances on lending guidelines. Of course the ideal situation is getting approved without the restriction of your present residence selling first or before your spouse lands their new job. When this occurs the lender has qualified you with carrying the expenses of both properties instead of just one or qualifying on only one income instead of two. Borrowers with substantial income and modest debt stand a better chance than those who have excessive debts or marginal incomes. The best way to approach these calculations is with the help of your lender. When your pre-approval is issued assuming that your present residence is going to be sold first, you will need to provide proof of sale prior to closing on the new purchase. There are three documents you may need in such cases: a copy of your listing agreement showing your house is on the market; a copy of any offer that has been accepted to sell your house; and a copy of the final HUD-1 settlement statement which proves your previous mortgages have been paid off and that your tax and insurance liabilities for that property have ended.3. Seek out lenders with flexible or more liberal guidelines. Loan approval guidelines can vary from program to program and from lender to lender. Some lenders are more liberal than others. Some approval methods, such as automated underwriting systems, will stretch debt-to-income ratios further than traditional underwriting methods. This is particularly true when the borrowers have high credit scores and adequate cash reserves. One lender may be able to qualify you regardless of whether your present home sells or not, while another will not. Many construction loan approvals often provide the maneuvering room to begin construction on a home before having to abandon your present home. Some lenders may be able to obtain an exception to standard guidelines based on compensating factors. If at first you don't succeed, don't give up but instead check with other lenders.4.Investigate solutions using expert professional advice. These situations lend themselves to creative solutions. You may be able to unlock the key to solving your situation with advice from Realtors, lenders, accountants, financial advisors, attorneys, and even employers. Some employers have benefit programs and access to relocation services. Some Realtors have skills in negotiating solutions or compromises with sellers. Some lenders have a variety of approaches that will work including bridge loans, piggyback loan structures, and stated income or no ratio loan programs.5. Consider a home equity loan before you list your home. Under most circumstances, refinancing or adding equity financing is precluded when the property has already been listed for sale. This underscores the importance for advance planning and working on your financing game plan long before you jump into listing your home or making offers. A home equity loan or line of credit is less expensive than a "bridge loan" but you need to undertake and complete the process BEFORE you list the property for sale. After it is listed such loans will be termed "bridge loans" and charged additional interest accordingly. 6. Consider a backup plan. Your situation may call for a fall back position. For example, if your present home doesn't sell, you could rent it out. You may need to explore that option and it is wise to do so well in advance. Your Realtor may be able to use a time advantage by lining up a tenant. Your lender will need to cover with you the type of lease or rental agreement that might be needed. The common thread that runs throughout these suggestions is advanced planning. Having time on your side will be the key to success in these situations. Not finding yourself behind the proverbial eight-ball will also mean less stress and anxiety. William Kugel is author of the column MORTGAGE$ in publication for thirteen years, a senior loan officer with GMAC Mortgage Corp., and a Mount Washington Valley resident. You may write him c/o of The Conway Daily Sun, visit the Web site www.gmacm.net/william_kugel or send e-mail to william_kugel@gmacm.com.All Rights Reserved. Copyright 2003, W.H. Kugel.