Unless you're keeping your current house as an investment or you can afford to pay two mortgages, you'll probably need to sell your current home in order to buy another. You might have to market your house, find the buyer and transact as you shop for new financing, though. Lenders understand that it's more convenient to transition out of one place and into another in a single move and they can approve you based on the projected sale of your residence.
Basic Financing Requirements
Lenders focus on your ability to meet credit, income and asset requirements when considering you for a new loan. As a current homeowner, your payment history -- as long as you don't have any recent late payments and property liens -- shows that you are a responsible borrower. Your ability to afford a new housing payment and other debts without overstretching your budget is also a concern. Depending on the loan type, lenders prefer that you spend no more than 40 to 50 percent of your income on all debts, including housing. Finally, the amount of your assets affects your down payment and the overall costs of financing. Based on these requirements, lenders can approve you for a loan before you actually sell your house.
Financing the Purchase
The lender makes selling your home a condition of financing if you rely on the sale proceeds, or equity, to close. The lender also requires you to pay off your existing mortgage -- without a late payment in the interim -- before giving you the loan if you can't afford to pay for both. If the profits from your home's sale will be used to cover the down payment, any estimated closing costs and any lender reserve requirements, your lender holds you to the figures it used to approve you. Changes to the sale that affect these figures can change the terms of your financing or prevent you from getting the loan altogether.
Getting a home loan commitment from a lender while trying to sell your home positions you for a simultaneous, or concurrent, closing. When completed, a concurrent close allows you to sell your house and buy the new house on the same day. The buyer of your current house pays you, and in turn, you deposit the sale proceeds into escrow to cover your purchase costs. A neutral third party, usually an escrow company, handles the simultaneous settlement and the transfer of funds. It also provides proof to your new lender that you paid off the previous home loan.
To ensure that you have a viable sale on your hands, a lender might want to see your home's listing information directly from the multiple listing service. It might also want to see the sales contract between you and the buyer, which includes the sale price and the closing time frame. It also might request a copy of the payoff statement for your current home loan to ensure that you are positioned to pay off the loan with the proceeds.
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