In this market, it is challenging to make a move if you must utilize the equity from the sale of your existing home for the down payment on a new home. Most Sellers will not accept an offer that is contingent on the successful closing of your existing property. But there is simple solution. Assuming you can qualify for both mortgage payments, and you have a 3 – 5% down payment for a conventional loan, you can close on the new home with a small down payment and ask your lender to “Recast” your mortgage once you close on the sale of your existing home.
Let’s use an example; You purchase a property for $300,000 and put 5% down and have a $285,000 mortgage with a $1,550 mortgage payment. Six months later you sell your house and walk away with $85,000 that you were planning on using for a larger down payment. You call up your lender and ask them to “Recast” the mortgage. This is a simple modification to the loan, where they will reduce the principal balance of the loan (in this case down to $200,000) at the same interest rate and amortize the mortgage over the remaining term of the loan. In this case, we started with a 30-year loan and now will have a loan with a remaining term of 29.5 years with a new lower payment of $1,070.
The only drawback to this strategy is that you would end up paying PMI (private mortgage insurance) because you are not initially putting 20% down, which is required to avoid it. You are required to carry this insurance for the first 24 months at which time you can request it be removed, if you performed a “Recast”, that paid the loan down to less than 80% of the original purchase price. Small price to pay for a fantastic alternative.
Keep in mind that the “small” down payment we mentioned earlier (3 – 5%) can be a gift or loan from a family member, a loan from your 401K, or other ideas we can brainstorm. While not all lenders offer this service, LeaderOne and most of our investors do. Feel free to call us and discuss this strategy in more detail as it relates to your personal situation.
Until Next Time!!