Using equity [loan] for down payment for new home?

Anonymous · ‎07-22-2020

I've been reading some articles on this lately and figured I'd post here to get some more insight from those in the know. I guess one of my concerns from reading on this forum over the years is that it's always frowned upon to apply for credit within 12 months or so of going for a mortgage loan. In tapping into current home equity however in order to obtain funds for a down payment on a new loan, that "rule" by default sort of goes out the window. Are lenders simply forgiving of this since they can see that your reason for credit apping your home equity is to fund that down payment?

I've got maybe $70k-$80k in home equity from my current home. If I were able to grab maybe $50k of that to use toward a down payment (along with around $30k in savings) I'd be able to put 20% down on a home in the price range that I'm looking at. Any advice on this thought process?

My plan would then be to sell my current home and in doing so pay off the ~$50k or whatever owed, then be back to 1 (the new) mortgage. I like this game plan as it allows for the purchasing of a new home without having to sell my current one first and have to worry about the in between phase living situation wise.

Anonymous · ‎07-22-2020

@Anonymous Well hello.

NC_Mtg_Loaner · ‎07-22-2020

I imagine this happens more often than you think.

Perfectly acceptable as long as your DTI stays in alignment---your HELOC payment can add quite a bit to the DTI if you're not careful or are on a fixed income.

__________________________________________________

Licensed NC Mortgage Loan Originator

Anonymous · ‎07-22-2020

Yeah that's what I'm unsure about. DTI would be a bit rough during the time between the HELOC + 2nd mortgage and selling the first house which could take a couple of months or 6+ months... you never know.

CH-7-Mission-Accomplished · ‎07-23-2020

@Anonymous wrote:
I've been reading some articles on this lately and figured I'd post here to get some more insight from those in the know. I guess one of my concerns from reading on this forum over the years is that it's always frowned upon to apply for credit within 12 months or so of going for a mortgage loan. In tapping into current home equity however in order to obtain funds for a down payment on a new loan, that "rule" by default sort of goes out the window. Are lenders simply forgiving of this since they can see that your reason for credit apping your home equity is to fund that down payment?

I've got maybe $70k-$80k in home equity from my current home. If I were able to grab maybe $50k of that to use toward a down payment (along with around $30k in savings) I'd be able to put 20% down on a home in the price range that I'm looking at. Any advice on this thought process?

My plan would then be to sell my current home and in doing so pay off the ~$50k or whatever owed, then be back to 1 (the new) mortgage. I like this game plan as it allows for the purchasing of a new home without having to sell my current one first and have to worry about the in between phase living situation wise.

I would be more tempted to buy the new house with a contengency that it is based on the sale of the old house. Then you have little risk. Right now nobody knows where the economy is going with COVID and so far the government has pumped into nearly $10 trillion if you count both Congress and the Fed, but that can't last forever. Without this massive stimulus we would be in a very deep recession or possibly a depression. Your equity position in the house your selling could drastically fall if the economy goes into the toilet. And lenders are forever changing terms. Right before the 2008 meltdown, I was working on a 300K, 12 month remodel on my old Seattle house. We redid everything. But we used a HELOC to fund the remodel and planned to refi the whole thing to a 30 year fixed. Well during that horrible year the lenders decided they would treat paying off second mortgages (HELOC) as cash out refinances and they wouldn't allow us to refinance out of this second mortgage. The payments were huge and I was terrified. Ultimately through sheer luck, BECU agreed to do the refi of the HELOC and the first into a new 30 year fixed. So now it's all at 3.75% for 30 years.

I guess my point is be careful because what is true today with lenders can change tomorrow and blow all of your assumptions out the window. I would rather sell the house you have and then agree with the new buyer to rent it back for six months or whatever until you close on your new house. Either that or just sell the old house now, bank the equity, and find a temp housing sitution.

Anonymous · ‎07-23-2020

@CH-7-Mission-Accomplished wrote:
I would rather sell the house you have and then agree with the new buyer to rent it back for six months or whatever until you close on your new house. Either that or just sell the old house now, bank the equity, and find a temp housing sitution.

That sounds a lot easier said than done, unfortunately. I've got a son and can't worry about a temporary housing situation.

I've also toyed with the idea of keeping the first house and renting it, as I could theoretically afford both mortgage payments for a while (if it took time to rent it). Looking at similar rentals in my area, the rent I could collect on it would pay for that mortgage plus the proposed HELOC. Just another thought, although ultimately I wouldn't want that situation to last forever.

CH-7-Mission-Accomplished · ‎07-23-2020

@Anonymous wrote:
@CH-7-Mission-Accomplished wrote:
I would rather sell the house you have and then agree with the new buyer to rent it back for six months or whatever until you close on your new house. Either that or just sell the old house now, bank the equity, and find a temp housing sitution.
That sounds a lot easier said than done, unfortunately. I've got a son and can't worry about a temporary housing situation.

I've also toyed with the idea of keeping the first house and renting it, as I could theoretically afford both mortgage payments for a while (if it took time to rent it). Looking at similar rentals in my area, the rent I could collect on it would pay for that mortgage plus the proposed HELOC. Just another thought, although ultimately I wouldn't want that situation to last forever.

Sorry for the bad advice. I was just trying to offer my own 2 cents.

iced · ‎07-24-2020

@Anonymous wrote:
I've been reading some articles on this lately and figured I'd post here to get some more insight from those in the know. I guess one of my concerns from reading on this forum over the years is that it's always frowned upon to apply for credit within 12 months or so of going for a mortgage loan. In tapping into current home equity however in order to obtain funds for a down payment on a new loan, that "rule" by default sort of goes out the window. Are lenders simply forgiving of this since they can see that your reason for credit apping your home equity is to fund that down payment?

I've got maybe $70k-$80k in home equity from my current home. If I were able to grab maybe $50k of that to use toward a down payment (along with around $30k in savings) I'd be able to put 20% down on a home in the price range that I'm looking at. Any advice on this thought process?

My plan would then be to sell my current home and in doing so pay off the ~$50k or whatever owed, then be back to 1 (the new) mortgage. I like this game plan as it allows for the purchasing of a new home without having to sell my current one first and have to worry about the in between phase living situation wise.

I see three main options here, though which is going to be best is entirely dependent on your local market and your finances.

1. Sell contingency: this is the safest play as there’s no DTI hit and minimal risk. The downside is, depending on local market conditions, sellers may be unwilling to accept a sell contingency. That is, it puts your offers at a disadvantage.

2. Put less than 20% down, sell old home, apply the portion of proceeds you would have borrowed to principal, and recast the mortgage. The downside is not all lenders allow recasting or less than 20% down.

3. HELOC like you stated. Downside is your DTI has to support both mortgages and the loan, plus you’re paying more interest on your own money. I personally like this option the least.

I have a somewhat similar situation in that I just bought, but could not have a sell contingency. I didn’t need the equity in the current home to make 20% down, but carrying both mortgages is brutalizing my DTI. My plan is to sell the old home, apply enough of the proceeds to have effectively paid 50% down, then recast. I keep my rate and terms, but drop my new mortgage by around $1600/month plus wipe the second mortgage off the books, thus lowering my DTI back to something very comfortable.

Anonymous · ‎07-27-2020

It sounds like options 1 and 2 while they may see better/safer also come with qualifiers, or factors that may make them not possible.

Maybe I should speak with an expert locally to solicit some advice?

Anonymous · ‎07-28-2020

Why can't you just sell your current home and find a new home to buy within the contingency period? Isn't that how it is supposed to work? Barring a contingency period, you have 6 months (check this) to use reinvest any proceeds into a new house without penalty/taxes.