You've found the new home of your dreams. The only problem is, you haven't sold your old house yet. Buying a new home before you've sold your old one can be challenging, even if you have the money to afford two mortgages. Still, grabbing that dream home is possible with a little finesse.
One way to snatch your new home before other buyers is to include a contingency clause in your purchase offer. With this clause, the seller will notify you if he or she receives another offer. You'll then have a short time, typically 24 to 72 hours, either to back out or seal the deal.
If you must decide, consider first whether you can afford two mortgages for the six months to a year that might be required to sell the first house. Also consider any impact on your long-term finances if your old house sells for less than you planned. If you choose to move forward, you'll have to jump some high hurdles to secure financing.
Fannie, Freddie and the FHA
Since the housing crisis of 2008-09, Fannie Mae, Freddie Mac and the Federal Housing Administration have established new rules for mortgages when your old home hasn't sold. For an FHA loan you must need the new house either because a job change has made commuting to the old one impractical, you're separating from your spouse and seek a new home, or your family has grown too big to fit in the old house.
The FHA also requires that you owe no more than 75 percent of the value of your old home. Fannie Mae has similar restrictions. If your home is sold but won't close before the new purchase, you must have reserves totaling six months of payments on the old house, as well as a signed purchase contract from a qualified buyer.
If you're planning to rent your old house, you'll get credit for 75 percent of the rental income only if you have at least 30 percent equity. Otherwise, your income needs to be large enough for you to qualify with both mortgages.
If you have excellent credit, a solid debt-to-income ratio and a lot of equity, another option is a bridge loan or wrap loan. A bridge loan typically lasts for six to 12 months and wraps your payments for both houses into one interest-only payment.
Although lender requirements vary slightly, you'll usually only be able to finance up to 80 percent of the total value of both houses. Be forewarned that this option socks you with two closing costs: one for the bridge loan and another on the mortgage on the new house.
If none of these options work and you still want the home, try some less orthodox ways to borrow the money. Check with your boss to see whether you can borrow from your 401(k) and if the loan will incur tax penalties. You can repay yourself when you sell your old home.
You might also consider hitting up relatives for cash. Be sure to document where the money came from. If it's a loan, your repayment plan must fit into your mortgage lender's debt-to-income ratios. If it's to be a gift, check your lender's rules regarding how much of a down payment can be gifted. You may also qualify for an unsecured personal loan, although interest rates typically will be higher.
Randi Hicks Rowe is a former journalist, public relations professional and executive in a Fortune 500 company, and currently a formation minister in the Episcopal Church. She has been published in Security Management, American Indian Report and Tech Republic.She has a bachelor's in communications, a master of arts in Christian education and a master of business administration.