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Unless you’re able to sell your existing home before making an offer on what you hope will become your new one, you might need a high enough income to prequalify for two mortgage payments a month. If you don’t make enough money, you might lose your potential dream home to other buyers.
It’s long been a challenge for homeowners who are selling a residence while looking for a new home at the same time: How do they handle their existing mortgage when applying for a new home loan?
Let’s explore what lenders look for when you have two mortgage payments and the important factors to consider if you buy a new home before selling your current one.
The Debt-to-Income Ratio Challenge
It’s that debt-to-income (DTI) ratio that makes life so difficult for buyers who are also selling a home. In fact, lenders will tell you that debts matter more than your credit score when it comes to qualifying for a mortgage.
“In today’s market, you are seeing more and more clients buying homes before selling their own home,” said David Hosterman, branch manager with Greenwood Village, Colorado-based Castle & Cook Mortgage. “From a lender’s perspective, a client must be able to qualify based on standard debt-to-income requirements.”
Lenders will want to work with borrowers whose total monthly debts – including current and estimated future mortgage payments – equal no more than 43% of their gross monthly income. Simply, to be approved for two mortgages, most borrowers must have a DTI ratio less than 43%.
If buyers who are already paying an existing mortgage want to make an offer on a new home without adding a contingency, they’ll have to earn enough income each month so that taking on another mortgage payment for the second home won’t push them past that DTI level.
You can inform lenders that you are trying to sell your current home, but you can’t offer any guarantees to them on when you’ll close that sale. Therefore, you might face several months of having to make two mortgage payments. If your lender doesn’t think you can handle any months of making two payments, they won’t approve you for a loan.
There is a relief for homeowners who have found a buyer for their home, even if that sale hasn’t yet closed when they need to make an offer on their new residence. Hillary Legrain, vice president with Bethesda, Maryland-based First Savings Mortgage Corporation, said that those buyers who have a ratified contract for the sale of their home can qualify for a new mortgage without having to factor in their current monthly mortgage payments.
That’s because lenders can see that these borrowers will be unloading their current residence before having to make the mortgage payments on their new home. But homeowners who haven’t secured any offers on their home yet have limited choices.
Carrying Two Mortgages at Once
It is possible to have two mortgages on two different houses. Buyers who have enough income can carry two mortgage payments at once if they still meet the DTI ratios required by their lenders.
For instance, if the total of your mortgage payments – your current one and estimated new one – comes out to $3,000 a month and your other monthly expenses equal $1,000, your lender will consider your monthly debts to be $4,000. If you have a gross monthly income – your income before taxes are taken out – of $10,000, your DTI ratio will be 40%, just under the 43% that many lenders use as a guideline today.
In this case, you might be able to qualify for two mortgages at the same time if your credit score and job status are also strong. But if you don’t want to manage two mortgage payments or your income isn’t high enough, a home sale contingency offer may be a great option for you.
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The Home Sale Contingency Offer
Many consumers have to make a contingency offer when they are trying to sell a home and buy one at the same time.
Joey Birkle, a senior loan officer with First Option Mortgage in Indianapolis, says that when buyers make a contingency offer, they don’t have to factor in their current mortgage payments when applying for their new mortgage loan. Lenders will only count their estimated new mortgage payments when calculating the borrowers’ DTI ratios.
“Basically, the contingency means their current home has to sell before they can buy the new home,” Birkle said. “The buyer will not purchase the new home until the current home sells. Therefore, the buyer doesn’t have to qualify carrying two mortgages.”
A typical contingency offer will come with two key stipulations:
- Date by which buyers have to sell their homes. If they don’t sell their homes by then, the contingency offer is terminated.
- Sellers can still market their homes to other buyers. If they receive an offer from another buyer, they have to notify the first buyer. That buyer then has the option to remove the contingency and purchase the home immediately or simply terminate their offer.
Home contingency offers do increase the risk that borrowers will lose out on the homes they want to buy. Many sellers won’t accept contingency offers, and those who do can still sell their residences to other buyers even if they have accepted a contingent offer from another.
Selling Home First, Then Buying
If consumers find the new home they want to buy too soon, they can greatly increase the challenge of successfully bringing a contingent offer to closing. After all, it can take a long time to sell a home, and the contingency offer might expire before buyers find the right offer for their residence.
“Borrowers tend to begin searching for a replacement home immediately when they put their current home on the market,” said Tanvir Karim, branch manager with Banc of California in Newport Beach, California. “More times than not, they will find a property they want to purchase prior to even receiving offers on their current residence.”
This is why some homeowners first sell their homes before they even begin looking for a new one. However, this does present its own challenges: Buyers will have to find somewhere to live on a temporary basis, usually renting an apartment until they find their new home. These buyers will also have to schedule two moves – one to move their stuff into an apartment and, probably, temporary storage, and a second to move into their new home.