You own a home now, but it’s time to make a change. If you’re moving up or downsizing, you probably have questions about how it all works. That is, the logistics of buying another home while you still own your existing property.
Here are 10 facts you need to know about navigating through the two transactions at once - to make the move as smooth as possible...
Get the facts on your existing home
What is your home worth?
Find out the value of your home by asking a Realtor to provide you with a detailed market evaluation. Alternatively, get a detailed estimate of the value by paying for an appraisal by a licensed appraiser. This will give you an idea of what residual funds you will net from the sale of your existing home which will determine how to structure a mortgage for the new home. Be conservative when working with the down payment amount so you have some wiggle room when negotiating the sale of your current home.
Three questions to ask
After you have determined what new mortgage amount you will require, you will then need to contact your current lender to ask them the following 3 questions...
1) Is the mortgage portable to a new property?
If it is and you are moving up, can the new mortgage rate be “blended” - and what will that new rate be in order to avoid paying a payout penalty?
2) If you were to pay the existing mortgage out in order to get a better rate, what would the penalty be?
Be advised that you are required to qualify for any new mortgage whether you “port” the existing mortgage to a new property or get a brand new one, as you are effectively only “porting” the terms of the mortgage
3) How are you going to sell your current home?
Options available to sell your home include for sale by owner, by a Realtor, or somewhere in between the two. I recommend using the services of a Realtor as I personally would like to leave any showings and negotiations with any potential buyers in the hands of a professional.
Ask a Mortgage Professional, Steven Porter, Mortgage Agent, Mortgage Architects
Financing your next home
Securing a pre-approval
Based on your initial findings about your current residence, I recommend obtaining a pre-approval for your next purchase as this will give you an idea of what kind of requirements you’ll need to meet in order to be approved for your next mortgage.
Quick, easy on-line mortgage pre-approval
What if your existing home hasn't sold by the time you take possession of the new home?
Your new mortgage may contain a condition to confirm your existing place has sold. This could be for either down payment or qualifying purposes, or both. See if a back-up plan is possible in case your existing home does not sell by the time you take possession of your new home. Your mortgage professional can work through a few potential scenarios with you until you’re comfortable with the options you have for all possible outcomes.
Investigate the "Home Sale Guarantee" offered by some professional Realtors
Keeping both homes, with one as a rental property
Perhaps you are looking into the possibility of keeping your current home and turning it into a rental property. Some lenders will allow this as long as you can qualify to carry both properties. Talk to your mortgage professional about the option of including potential rental income to help you qualify. Be aware that lenders tend to calculate the inclusion of rental income differently, so if you don’t qualify with your current lender, check others. If you are leaning to keeping both properties, ensure you explore all options in accessing funds for the down payment on the new home. For example, is a gift from a family member a possibility? Do you have sufficient funds in savings? Can you look at refinancing your current residence to access the equity?
What down payment requirements and proof do you need to provide?
If the down payment is coming from anywhere other than the sale of your existing home, the requirements are pretty straightforward; your lender will look for the paper trail to support the source of the funds being used. If the down payment funds are coming from the sale of a property, you’ll be asked to confirm what your equity position is via a current mortgage statement, as well as a copy of a fully-executed sale agreement for your current residence, along with all condition removals related to that contract.
The qualification process
Qualifying for your next home will be similar to getting approved the first time. Your lender will be looking at the usual application aspects - like income, credit, down payment, and the property you’re financing. If your income or credit profile has changed drastically, such as you becoming self-employed or your credit not being as good as it used to be, be sure to have a conversation with your mortgage broker about how the qualifying process could differ from the first time around.
Consider what you'll need for supporting documents
While many of our mortgage rules have changed, document requirements likely haven’t changed too much since you last qualified. What you’ll be asked to provide will be dependent on your current financial profile. Your mortgage professional, along with a mortgage pre-approval, will give you an idea of what you’ll be asked to provide in terms of supporting documents.
What to do when you need bridge financing
If the possession date for the sale property is after your purchase possession date, and you need those funds for a down payment, there is a solution known as bridge or interim financing. The lender will not only finance your mortgage, they will also give you a short-term loan to cover the down payment. This way the seller gets their money and you get possession of your new home even though your old home is still technically yours. Once your existing place has sold, your lender will recover the funds they lent to cover your down payment. It is important to note that you must have an unconditional or firm offer for your existing home in order to qualify for bridge financing. Be aware that not all lenders offer bridge or interim financing and the terms and costs for this service can vary, so double check the conditions before you commit.
Moving confidently from one home to the next
It can be stressful to sell and buy simultaneously. There are a lot of things that need to go right in order for everything to go smoothly for you. The best way to ensure a smooth move is to do your research first. Explore your options until you find one that allows you to confidently move forward into your next home while leaving the last one fondly behind.
Reprint - GoldenGirlFinance
For all your mortgage needs contact Steven Porter, Mortgage Agent/Planner, Mortgage Architects - 1-905-875-2582 or steven.porter@mtgarc.ca
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