Trade-up home buying has a different set of issues to conquer than the first-time home buying process. The first-time home buying process is about education. The first-time home buyer is figuratively diving into the water for the first time. Whether they make a beautiful swan dive or belly flop depends a lot on how well they were educated before they entered escrow by their real estate agent and mortgage originator.
The trade-up home buying process has an element of education, but it is more about coordination. How does the trade-up buyer coordinate the sale of their existing home with the purchase of their new home? Here are nine points that the trade-up buyer and their real estate agent need to know about in terms of financing to successfully coordinate the disposition of their current home along with the purchase of the new home:
Loan approval does not necessarily mean that you should release loan contingency. A loan approval always has conditions. If you are selling your current home, one condition lenders usually have is a copy of the closing statement from the sale of the current home. What happens if your buyer backs out? How comfortable are you with the ability of your buyer to buy your house? You need to find out all of the conditions from your lender so that you know exactly what has to happen in order to get your loan. Do not release loan contingency until you are aware of the conditions and are confident that you can satisfy these conditions.
Your mortgage originator needs your tax returns, even if the loan approval does not require it. Here is why: some of us try to minimize the amount of income tax we pay. Some of us use form 2106, which allows us to report unreimbursed business expenses on schedule A of our tax return. Lenders deduct this amount from your income for qualifying. Sometimes the lenders will not ask for tax returns, but they almost always ask for form 4506-T. Form 4506-T is a summary of the tax return you have filed with the IRS. If you have unreimbursed business expenses claimed, the lender most likely will re-underwrite the file and may even deny the file because your income is not as much as originally presented! Give your tax returns to your mortgage originator to prevent this problem upfront!
If you plan on renting your current home, you may not be allowed to use the rental income to qualify. I recently wrote a post about this subject - Before You Advise Your Client Rent Their Current Home And Buy Another, You Need To Know This!.
If you plan to sell stocks, bonds, and/or mutual funds for the down payment, you are best served selling prior to having your file underwritten. Here is why: If you do not provide proof of liquidation, many lenders will value the worth of your holdings at 70% of the verified amount. Without proof of liquidation, the lender my determine that you are short on cash to close escrow, even if in reality you are not. Prove it now to save headaches later!
Are you trading-up because of a job transfer? Here is what you need: an employment offer letter, clear of any conditions (drug test is an example), and an affidavit signed by you stating that you will provide a paystub within 30 days of closing.
Try your best to nail down your loan amount and your interest rate up front! Here is why: If you increase your loan amount and/or change your interest rate after your lender has sent their initial disclosures, they may require re-disclosure and a new seven day waiting period before they can close escrow! Set it and forget it!
Take care of your credit score before you write an offer. Most lenders use the middle score of three credit repositories. In addition, the qualifying score most use is the middle score from the borrower with the lowest score among all the borrowers involved in the purchase. Credit scores can be changed if there are errors on the report. Work with your mortgage originator to make these changes now rather than while you are in escrow.
If you want an impound account, set it up after the close of escrow. Here is why: cash to close is one of the issues that often causes a headache at closing. Impound accounts require more cash to close. Why complicate an already stressful situation? Close escrow, call your lender, and then set up the escrow account when there's not as many hoops to jump through!
- Don't count on 100% of your retirement funds as cash reserves. Most lenders are now only counting 60% of the value of retirement funds as cash reserves. For example, if you have $20,000 in retirement funds, the lender will only value these funds as $12,000.
Do you need help making an effective financial decision? Call or text me at (650) 222-0386, or e-mail me.
Opes Advisors is licensed by the CA Department of Business Oversight 4150089, CA Bureau of Real Estate 01458652, Oregon ML -4902, Washington CL-1178435 and NMLS 235584. Equal Opportunity Lender. Opes Advisors is a registered investment advisor with the Securities and Exchange Commission (SEC). ©2014 Opes Advisors, Inc. All rights reserved.