- The Washington Times - Friday, March 14, 2008

In these anxious economic times with home buyers and sellers concerned about mortgage rates and programs, move-up buyers can be particularly worried about making a smooth transition from one home to the next.

While finding the right home to purchase may be less of a problem given the high inventory of homes on the market, selling a home may be more difficult. Obtaining financing can be another challenge, but local lenders have programs in place to assist move-up buyers.

“There are lots of options for borrowers who want to move from one home to the next, but I always recommend, no matter what the market conditions are, that people sell their current home first,” says Phil Drew, a lender with Carteret Mortgage in Ocean City, Md.

“If you sell your home first, then you know exactly what you are working with in terms of assets,” Mr. Drew says. “I think buying a new home and then trying to sell your current home puts way too much pressure on the family, especially in a market like this one.”

Deborah Manarin, a Realtor with the Manarin Group of McEnearney Associates in Arlington, says the decision whether to sell the current home first or buy another home first depends on individual circumstances, but working with a good lender is the most critical element for move-up buyers.

“People have to figure out which will be the more difficult of the two issues: Selling their existing home can be hard for some people, but for others, finding the home they want in the location they want can be harder,” Mrs. Manarin says. “There’s a misconception that all sellers are desperate. It really depends on the marketplace.”

Mrs. Manarin says this area has “narrow markets,” in which two neighborhoods just half a mile apart may have completely different circumstances, with homes in one selling quickly and homes in another not selling at all. Areas such as Old Town Alexandria and Fairlington are seeing healthy sales, she says.

“The bottom line is that people need to evaluate which step will be more complicated, buying or selling, and base their strategy on that,” Mrs. Manarin says.

Char-Lee Smith, a mortgage consultant with the Smith-Pagnotta Team of First Horizon Home Loans in McLean, recommends that move-up buyers sell their home first.

“Sometimes sellers can arrange a rent-back to stay in their home for a certain period of time after settlement, renting it from the buyer,” Mrs. Smith says. “The problem is that a long-term rental cannot be arranged because the buyers will have arranged their financing based on the fact that they are owner-occupants, so they must move in by a certain date.”

Rent-backs normally are approved for 30 to 60 days, but Mr. Drew says sometimes they can be as long as 180 days, allowing time for the seller to find a new home.

Mrs. Smith says the safest scenario is for consumers to sell their home and move into a temporary rental until they are ready to purchase their next home, although this requires moving twice.

Move-up buyers who decide to follow the somewhat riskier path of placing a contract on their new home and then putting their current home on the market have several options.

“One choice is that the sellers can refinance their current home or get a second mortgage on their existing home to free up cash which they can use to make the payments on the new home,” Mr. Drew says. “This way, they are using the old house to finance the new one.”

Mr. Drew says that despite media reports of the difficulty of obtaining home equity loans, borrowers with good credit scores should be able to qualify for this type of loan. He recommends that homeowners contemplating moving obtain a home equity loan or line of credit before they begin looking for a new home so they have a better idea of what they can afford.

Mr. Drew’s financial example is a $500,000 home with $200,000 owed on a first mortgage and $300,000 of equity. Most lenders will offer an 80 percent loan-to-value mortgage, allowing the homeowners to borrow $200,000, which can be put in the bank and used for a down payment and monthly payments for the next home.

“The trick to this scenario is that the lender on the new house will count both your first and second mortgage against you, so you will need to qualify to pay for all these loans,” Mr. Drew says. “The only exception is if your old house can be rented and you can use that rental income to offset the mortgage, but only part of the rental income will count.”

Mrs. Smith says more customers opt to rent their existing home and wait for the real estate market to improve. She says just 75 percent of the rental income will be considered to offset the mortgage because lenders realize that it can be difficult to keep the home rented consistently.

“Homeowners who need to have the entire mortgage on their first home offset in order to qualify for the loan for their new home will need to charge a rent which is higher than their mortgage payment,” Mrs. Smith says.

Mr. Drew says the approval process for the mortgage on the new home could be subject to proof that the existing home has been rented or that the home has been sold, which would require providing a settlement sheet on the home to the new lender.

“All of these scenarios are dependent on the borrowers,” Mr. Drew says. “Lots of people in this area have the disposable income to carry both loans.”

Instead of a home equity loan or a refinancing of the existing home, move-up buyers also can apply for a so-called “bridge loan.”

Mr. Drew says bridge loans are usually limited to six months and are often extendable for another six months, at which point they are due in full. Homeowners also may want to ask about the possibility of a “reverse bridge loan,” which is less common but sometimes available.

“In a twist on the standard bridge loan, a few lenders are putting the bridge loan on the new home instead of the old home, which allows them to cross-collateralize it across both homes,” Mr. Drew says. “This way, the loans are the first loans on both properties and therefore would be paid off first by the sale of either home if necessary.”

For example, Mr. Drew says, consider a scenario in which someone owns a home appraised at $500,000 and is buying a home appraised at $800,000, for a total of $1,300,000 in property, and owes $200,000 on the first home. A lender would lend the buyer $1,000,000 to cover the $800,000 for the new home and the $200,000 loan for the first home.

Upon the sale of the first home, the lender would be paid $500,000 and then the owners would be paying off the rest of the $500,000 as their mortgage.

Mr. Drew suggests that move-up buyers purchasing from an individual rather than a builder may be able to negotiate with the seller to hold all payments in escrow for six months to one year while they sell their existing home.

“Now that the market has slowed, seller financing is more acceptable to sellers today,” Mr. Drew says.

Mr. Drew says move-up buyers need to be working with a team of an experienced lender and an experienced real estate broker who can creatively look at all of these financing options.

Updating information with a lender and making sure a loan program is still in place is crucial for move-up buyers.

“Things have changed substantially in recent months, and people need to realize that they may need to make a larger down payment than they thought they would need,” Mrs. Manarin says. “Their ability to qualify for a particular loan may have changed, too. Even if their credit score hasn’t changed, the loan program they want may now require higher qualifications.”

Mrs. Manarin says that because the market shifts quickly, move-up buyers need to work with a Realtor to evaluate whether they can sell their home and for how much.

Some sellers opt to offer financial incentives as a lure for buyers, but Mrs. Manarin says, “Nothing beats having a house in perfect condition at the right price to get a home sold.”

Mrs. Manarin recommends that sellers budget 1 percent to 2 percent of the sales price of the home to spend on upgrading the property.

“The rule of thumb is that you don’t always have to do outrageously expensive things but that you should need to do things that make a home look warm and inviting,” Mrs. Manarin says. “You need to do things that get people through the door, things that will make the home look good in the pictures they will see on the Internet.”

“I think home ads that boast ‘reduced price’ or ‘bonus to agent’ scream that there’s something wrong with the home,” Mrs. Manarin says. “I’d rather go in the positive direction of getting the home in great condition and staging it to look its best.”

Homeowners ready to make a move into their next home need to be ready for a three-pronged attack: arranging their financing, preparing their home for sale and then finding a new home.

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