How to purchase new home by selling another
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By Scott Sheldon  November 29, 2013 12:00 am

In the last few years, many consumers bought homes with low down payments and have seen a dramatic rise in their home-equity, opening the door to trade up to more desirable homes and/or locations. 

Perhaps the family is expanding and or the timing is right to trade up. 

As attractive as the concept sounds, because of the tight lending standards, taking the right steps should be the main focus. 

How does one pay off one’s home and use the net proceeds from the sale to purchase of home, and still get the loan?

 

Steps to buying and selling

Mortgage lenders are still restrictive on debt ratio, most allowing no more than 45 percent of the monthly income, with changes coming in January 2014 reducing this percentage to 43 percent. 

The reason most sell one house in exchange for another is because they don’t have enough income to carry two mortgage payments, don’t want to be a landlord and/or need the equity for the down payment on the new home.

 

Get preapproved for loan

Have the lender issue you a preapproval as though your current home is already sold/closed. By having the lender omit your housing liability, your projected debt ratio is reduced, making your credit picture look better on paper. This preapproval can include the down payment from the sale of your current house.

 

Use a real estate agent

Get professional real estate representation; your home depends on it. Here’s why: your agent can represent you on the buy side on your new property, facilitating a successful and smoother process for both transactions because they can communicate with the other agents as the intermediary, which solidifies both sales up through close of escrow.

 

Write a contingent 

purchase offer

It’s well known a contingent offer, that is, one property selling in exchange for being able to perform another, is weaker than if there is zero contingency. While this is certainly true, contingent offers are becoming more common, and transactions are still closing on contingent basis.

 

Releasing your loan 

contingencies at same time

In most real estate contracts, you fully commit yourself to purchasing the property at 17 days. 

During the first 17 days, it’s expected of you as the home buyer to make sure your lender attains loan approval. After your loan is approved, release your contingency at the same time the buyer of your home releases their contingency. That way, you don’t release contingencies on a property risking the possible forfeiture of your initial earnest money deposit if the buyer of your property can’t perform.

Quite often, most can have a larger home or be in a more desirable neighborhood for the same and/or slightly higher mortgage payment on the new property. 

How is this possible? When you take into consideration the size of the down payment generated by selling one property, it has a dramatic effect on not only buying power but also payment threshold.

Remember as a general planning tool,  it’s $725 per month in mortgage payment for every $100,000 financed.

 

Scott Sheldon is a local mortgage lender, with over six years of experience helping people purchase and refinance primary residences, second homes and investment properties. Visit him at www.sonomacountymortgages.com.

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