Down Payment Options

[purplepenguin7]

We are starting to get the ball moving seriously on selling our current place and buying a new one. Despite my realtors advice, we want to make sure we have a house under contract first before we sell ours. However, this means logistically likely won't have the profit from our current house that would be about half of our down payment. I've heard of bridge loans but is that our only option?


*deleted financial details*

[madringal]

If you qualify for it, I would just get a loan for as much as you can, and then when you sell your home you can recast your mortgage. Make sure it is an option your lender offers, but if they do, you can basically make one large payment and then they will figure our your new payments for the rest of the term (and then you can drop PMI at that point too).

ETA: When I say "as much as you can" I mean like 95% of the purchase price instead of 80%

[ohgillian]

I'm under the impression that an IRA/401k loan would have a lower interest rate than a bridge loan, but I've never done either.

[lessel]

We did a bridge loan. I think it cost us like $400 all told? It was super-easy and no big deal at all. Based on how houses in our neighborhood were selling, we had a pretty comfortable idea of what our house would sell for (desirable house style, location, etc.), so we didn't feel like the bridge loan was risky at all.

First thing we did was get approved for the bridge loan, but didn't execute it... Went under contract on the house we were buying in May, then signed the bridge loan paperwork. Immediately put our house on the market and went under contract in like 48 hrs. Closed on the house we were buying in early June (let sellers have temp occupancy to plan their international move). Moved into the new house in early July, closed on the house we were selling the next week. The sale paid off our mortgage and bridge loan. Because it all happened so quickly, I don't think we made one payment on the bridge.

We got more $ from the sale, above and beyond what our bridge loan amount was. We could have put that toward our current loan and recast the mortgage, as PP mentioned. But we used it for other things (new house improvements, invested a bit).

[acr]

Aug 18, 2021 9:21:56 GMT -5 madringal said:

If you qualify for it, I would just get a loan for as much as you can, and then when you sell your home you can recast your mortgage. Make sure it is an option your lender offers, but if they do, you can basically make one large payment and then they will figure our your new payments for the rest of the term (and then you can drop PMI at that point too).

ETA: When I say "as much as you can" I mean like 95% of the purchase price instead of 80%

This is what I would suggest too. 

[purplepenguin7]

Aug 18, 2021 9:21:56 GMT -5 madringal said:

If you qualify for it, I would just get a loan for as much as you can, and then when you sell your home you can recast your mortgage. Make sure it is an option your lender offers, but if they do, you can basically make one large payment and then they will figure our your new payments for the rest of the term (and then you can drop PMI at that point too).

ETA: When I say "as much as you can" I mean like 95% of the purchase price instead of 80%

this was our original plan, but it's effecting the strength of our offers.  We put in an offer with a 10% dp and lost it due to another offer with a higher dp. is there another way to do this? 

[purplepenguin7]

lessel, thanks for that time line, very helpful!. I think that might be something we should do. Just wondering though, does the bridge loan amount effect your pre-approval? That's another concern we have because our pre-approval amount is a little low because of the carrying two mortgages at a time (on paper).

[Susie]

Aug 18, 2021 9:21:56 GMT -5 madringal said:

If you qualify for it, I would just get a loan for as much as you can, and then when you sell your home you can recast your mortgage. Make sure it is an option your lender offers, but if they do, you can basically make one large payment and then they will figure our your new payments for the rest of the term (and then you can drop PMI at that point too).

ETA: When I say "as much as you can" I mean like 95% of the purchase price instead of 80%

That's basically what we did this spring.  None of the lenders we talked to offered bridge loan products, and this route was lower risk and more streamlined than trying to do a 401k loan.  It was also WAY lower stress than trying to align closings.

Our rough timeline was:
March - found our house, offer accepted, contract ratified
April - listed our house for sale, accepted an offer
May - closed on our purchase with 5% down
June - sold our old house

The plan was to put the money from the sale directly into the new mortgage and recast + eliminate PMI.  We haven't done piece yet.  Our mortgage rate is 2.75%, the payment is manageable, and I opted to first pay off what was left of my buy in loan from when I became a shareholder in my firm.  It was at 5%.  We're also using a little of the cash to make some immediate improvements.  I still anticipate doing the recast/drop PMI before the end of the year.

There are a couple negatives here.  One is that a smaller down payment doesn't look as strong if you're in a super hot seller's market.  The other, which we ran into, is that it makes you vulnerable to appraisal issues.  Our house appraised for 3-4% less than contract price, so putting 5% down actually meant putting like 8% down relative to what we offered to get the house.  You have to be prepared for that possibility.

[madringal]

Aug 18, 2021 9:35:19 GMT -5 purplepenguin7 said:

Aug 18, 2021 9:21:56 GMT -5 madringal said:

If you qualify for it, I would just get a loan for as much as you can, and then when you sell your home you can recast your mortgage. Make sure it is an option your lender offers, but if they do, you can basically make one large payment and then they will figure our your new payments for the rest of the term (and then you can drop PMI at that point too).

ETA: When I say "as much as you can" I mean like 95% of the purchase price instead of 80%

this was our original plan, but it's effecting the strength of our offers.  We put in an offer with a 10% dp and lost it due to another offer with a higher dp. is there another way to do this? 

Not really, no.  In this market there is always going to be someone that has a edge. You put down 20, someone else says they can do 25. You just have to do with what you can. 

Also, Bridge loans are not as easy to come by as people make them seem. I have been in lending a long time and have never worked for a lender that offers them. But your realtor may know someone? 

[acr]

Aug 18, 2021 9:35:19 GMT -5 purplepenguin7 said:

Aug 18, 2021 9:21:56 GMT -5 madringal said:

If you qualify for it, I would just get a loan for as much as you can, and then when you sell your home you can recast your mortgage. Make sure it is an option your lender offers, but if they do, you can basically make one large payment and then they will figure our your new payments for the rest of the term (and then you can drop PMI at that point too).

ETA: When I say "as much as you can" I mean like 95% of the purchase price instead of 80%

this was our original plan, but it's effecting the strength of our offers.  We put in an offer with a 10% dp and lost it due to another offer with a higher dp. is there another way to do this? 

Talk to your lender - but when you make an offer, it can say you're putting down 20%, but the terms of your actual loan are between you & your lender. 

When we bought this spring, our offer showed 20% but we only put down 5%. We had to provide "proof" that we had these funds available (so a print up of investment or retirement accounts is fine), but didn't have to use them. I'm not sure our seller ever asked to see the proof, but we had it ready if needed. 

[purplepenguin7]

Aug 18, 2021 10:09:04 GMT -5 acr said:

Aug 18, 2021 9:35:19 GMT -5 purplepenguin7 said:

this was our original plan, but it's effecting the strength of our offers.  We put in an offer with a 10% dp and lost it due to another offer with a higher dp. is there another way to do this? 

Talk to your lender - but when you make an offer, it can say you're putting down 20%, but the terms of your actual loan are between you & your lender. 

When we bought this spring, our offer showed 20% but we only put down 5%. We had to provide "proof" that we had these funds available (so a print up of investment or retirement accounts is fine), but didn't have to use them. I'm not sure our seller ever asked to see the proof, but we had it ready if needed. 

that's what I was hoping, but my realtor said we couldn't do that.  ugh, we need to get rid of her for many reasons but this is just another piece of her bad advice. 

[purplepenguin7]

Aug 18, 2021 10:01:12 GMT -5 madringal said:

Aug 18, 2021 9:35:19 GMT -5 purplepenguin7 said:

this was our original plan, but it's effecting the strength of our offers.  We put in an offer with a 10% dp and lost it due to another offer with a higher dp. is there another way to do this? 

Not really, no.  In this market there is always going to be someone that has a edge. You put down 20, someone else says they can do 25. You just have to do with what you can. 

Also, Bridge loans are not as easy to come by as people make them seem. I have been in lending a long time and have never worked for a lender that offers them. But your realtor may know someone? 

thanks!  Good to know that bridge loans aren't as easy as they seem.  I've only heard of it as an option but haven't looked into the logistics of it yet. 

[jlt19]

I think it's weird that people care what other people are putting down. Our buyers are putting 0% down b/c they got a VA loan, and we're closing 4 days earlier than expected (tomorrow!). With the low mortgage rates, I think it's almost smarter to not sink so much into a mortgage if possible. We ended up doing 10% b/c we had it in cash and that way we didn't have to go through all the scenarios you're thinking about. We MAY pay off enough to get rid of PMI with the proceeds, but we may not. I haven't decided yet.

Your first real step will be to see how much your DTI will be with both mortgages, b/c that'll dictate how much you can get the loan for. I originally wanted a 20 year mortgage, but we wouldn't qualify w/o having sold our house first.

I will say, if you're emotional at all, selling after moving was so good for me. I just left my house for the last time, and while I cried, knowing that I'm already in the other house and it's starting to feel a bit more like home already was HUGE for me. It was a GREAT sense of closure vs. rushing in/out in one day.

[scm1011]

Aug 18, 2021 12:22:47 GMT -5 jlt19 said:

I think it's weird that people care what other people are putting down. 

If a buyer is putting down 0% or a small amount and the appraisal comes back low they might not have the cash to bridge the gap and will lose financing. 

[purplepenguin7]

Aug 18, 2021 12:22:47 GMT -5 jlt19 said:

I think it's weird that people care what other people are putting down. Our buyers are putting 0% down b/c they got a VA loan, and we're closing 4 days earlier than expected (tomorrow!). With the low mortgage rates, I think it's almost smarter to not sink so much into a mortgage if possible. We ended up doing 10% b/c we had it in cash and that way we didn't have to go through all the scenarios you're thinking about. We MAY pay off enough to get rid of PMI with the proceeds, but we may not. I haven't decided yet.

Your first real step will be to see how much your DTI will be with both mortgages, b/c that'll dictate how much you can get the loan for. I originally wanted a 20 year mortgage, but we wouldn't qualify w/o having sold our house first.

I will say, if you're emotional at all, selling after moving was so good for me. I just left my house for the last time, and while I cried, knowing that I'm already in the other house and it's starting to feel a bit more like home already was HUGE for me. It was a GREAT sense of closure vs. rushing in/out in one day.

I argue with my H non-stop about this because can't his wrap his head around why it matters if we can secure the financing either way.  I can see how with multiple offers to chose from a seller would lean towards the one with the most cash. With interest rates so low, i'd love to put down 5-10% but ultimately I don't think that's going to get us winning bid in this market. 

That aside, thanks for the point about being emotional.  I am super sentimental and this was our first house and a new construction.  We picked out every detail of the house and then lived here for nearly 13 years even so we've been through a lot of life stages here.  There is no way I won't be sad leaving even though we've outgrown it in so many ways. 

[aprilsails]

I would talk to a broker about bridge loan availability. We were talking to two lenders at one point and they were available with both no problem. It cost $400 total for a 10 day bridge and that was mostly for the paperwork.

Maybe it’s just really common in Canada and not in the US. I think everyone I know has gotten a bridge loan when buying and selling.

[lessel]

Aug 18, 2021 9:38:31 GMT -5 purplepenguin7 said:

lessel, thanks for that time line, very helpful!. I think that might be something we should do. Just wondering though, does the bridge loan amount effect your pre-approval? That's another concern we have because our pre-approval amount is a little low because of the carrying two mortgages at a time (on paper).

Sorry, saw this earlier and the day got away from me. I honestly can’t remember. We worked with the same lender for the mortgage and bridge. They were like different sections of the same company (brick and mortar bank locally). I don’t think the bridge had any impact on our pre-approval though. Although we asked for pre-approval for a specific amount, not like the ceiling of what we could afford. We knew our ballpark for what we wanted to pay and didn’t ask for higher.

I do think as someone else mentioned the bridge interest can be higher than a 401k loan. But we didn’t even make one payment. And, if I remember correctly, you can get a bridge and sit on it and not pay anything on it until you pull out the money.

I don’t think the sellers ever knew we had a bridge. We made our offer competitive in other ways—asked for inspection but said we would waive repair requests, went with their timeline for closing and temp occupancy vs. our preferred timeline, higher earnest money amount. That’s about all I can remember…two years ago seems so far away!!

[Susie]

Aug 18, 2021 12:22:47 GMT -5 jlt19 said:

I will say, if you're emotional at all, selling after moving was so good for me. I just left my house for the last time, and while I cried, knowing that I'm already in the other house and it's starting to feel a bit more like home already was HUGE for me. It was a GREAT sense of closure vs. rushing in/out in one day.

I felt this way too.  We bought our new house 5/26, spent a month painting and getting new floors put in, moved 6/28, and closed on our sale 6/30.  I had a sad trip back to the house to do a once-over/"did we do the right thing?" the night after we moved, but by the time we showed up to closing, I had the keys and garage door openers in a bag with a bow on it, and was happy to turn it over.

Selling that house was hard, after 13 years, 2 kids, great neighbors, etc.  But being settled in the new house made the actual end steps of selling it much easier and happier.

[purplepenguin7]

Aug 18, 2021 17:24:02 GMT -5 lessel said:

Aug 18, 2021 9:38:31 GMT -5 purplepenguin7 said:

lessel , thanks for that time line, very helpful!. I think that might be something we should do. Just wondering though, does the bridge loan amount effect your pre-approval? That's another concern we have because our pre-approval amount is a little low because of the carrying two mortgages at a time (on paper).

Sorry, saw this earlier and the day got away from me. I honestly can’t remember. We worked with the same lender for the mortgage and bridge. They were like different sections of the same company (brick and mortar bank locally). I don’t think the bridge had any impact on our pre-approval though. Although we asked for pre-approval for a specific amount, not like the ceiling of what we could afford. We knew our ballpark for what we wanted to pay and didn’t ask for higher.

I do think as someone else mentioned the bridge interest can be higher than a 401k loan. But we didn’t even make one payment. And, if I remember correctly, you can get a bridge and sit on it and not pay anything on it until you pull out the money.

I don’t think the sellers ever knew we had a bridge. We made our offer competitive in other ways—asked for inspection but said we would waive repair requests, went with their timeline for closing and temp occupancy vs. our preferred timeline, higher earnest money amount. That’s about all I can remember…two years ago seems so far away!!

thank you, very helpful info!  I'm going to ask our mortgage guy about bridge loans next time I talk to him.  meanwhile, our house isn't ready to list and we can't find anything we even want to see to buy so who knows where we'll be at.  Gah this whole process is so stressful.