It’s SPRING MARKET and now is the time a lot of people consider selling (or renting out) their current homes and moving somewhere new. If this sounds like you, read on for more information as homeowners who are selling a property at the same time as buying, are often the least serviced customers in the mortgage industry. If you are both buying and selling your home, you are now managing TWO transactions instead of one and should contact a Mortgage Broker to have a thorough discussion of your mortgage plan and goals.
Here are the main things to consider:
ARE YOU PRE-APPROVED?
Due to all the changes to mortgage qualification rules in the past few years, start off by obtaining a fresh pre-approval BEFORE listing your property to ensure you qualify for the new home you’ve been eyeing. Also, a pre-approval will allow you to hold a rate for 120 days while you are out shopping.
DO YOU QUALIFY FOR TWO HOMES?
During your mortgage consult, ask if you qualify to debt service two mortgages! If so, you can then go shopping with the peace or mind that if you don’t sell your home in time, financing for your purchase will not fall apart AND you can afford to carry the mortgages on both properties.
Alternatively, you can consider renting out your first property. However, keep in mind that one of today’s leading causes of mortgage default is assuming you can find a renter for your current home, not being able to find a renter, and then not being able to afford to carry two sets of mortgage payments, utilities, property taxes, and condo fees.
For the above two options, you will need down payment funds from outside of your home’s equity (such as from savings or a gift from family). If this is not possible, we can discuss refinancing your current home but this transaction must be completed PRIOR to listing and, depending on your equity position, may or may not be an option for you.
WHEN BUYING FIRST:
- There is less rush to buy – As a date hasn’t already been set on when you need to move out, you can take your time shopping. There’s less stress if you put an Offer down on a property and it falls through as you can just keep shopping.
NOTE: As mortgage default insurance premiums increasing on March 17, 2017, if you are purchasing with less than 20% down, you could have as little as 1% equity in your new home on possession day (after having put 5% down). This means you may not have the funds to pay a Realtor, sell, and move for several years after you buy. Choosing the right home to buy is now more important than ever!
- The pressure is now on to sell your home on a timeline – Unless you can qualify for both mortgages, you can reduce the price of the home you are selling in order to move it. This can result in you needing to sell a property from a desperate position.
OTHER THINGS TO CONSIDER:
- You can request that your Realtor make a “Subject to Sale” Offer – Such a clause means that your Offer is subject to you selling your property on or before such and such a date. For this type of Offer, the Seller will typically insist on a 48 to 72 hour clause. This means that if the Seller receives another Offer, you will have the right of first refusal but in order to keep your Offer in place, you will have to lift all conditions (ie. financing, inspection, AND the “subject to sale” condition) within three days. This can be risky.
- Without a firm sale on your home, you won’t be able to port your mortgage to your new home and you will be subject to a mortgage penalty. Make sure to consider that penalty when calculating your new home budget.
NOTE: This penalty may be credited back to you if you purchase within the time frame your Lender allows but it will still be charged when your Lawyer pays out your mortgage on the possession day of the sale.
WHEN SELLING FIRST:
First things first, “to sell first” means that you start shopping after you have a “firm sale” on your existing property. This happens when a Buyer removes all conditions on their Offer to Purchase for your home, regardless of their possession date.
- This makes it easier to budget – With a firm sale on your home, you can go house hunting knowing EXACTLY how much money you have for a down payment and to pay down debts.
- You could end up buying a home that isn’t right for you – You might settle for a home that isn’t right for you OR you might pay more than you had planned because you feel pressured to find a home before the date you need to be moved out of your house.
- With a “firm sale”, you can apply for short-term financing (also known as Bridge Financing), which allows you to use the equity in your current home to pay for the down payment of your new home if the sale of your current home completes after the possession day on your new property.
NOTE: Keep in mind that you will still need some funds outside of your equity to be able to put down an initial deposit on an Offer to Purchase.
- Porting your mortgage may be possible. As it involves moving your current mortgage to your new property, this could save you from having to pay a penalty. However, when porting your mortgage, the exact mortgage product you currently have (including rate) must move over and with today’s record-low interest rates, porting may either not end up saving you money or may leave you with higher monthly mortgage payments.
- Porting your Mortgage Default Insurance Premiums (ie. CMHC fees) may also be possible. However, when porting your CMHC fees, you may need to “top up” your premiums on any new money you borrow and this “top up” premium rate will be significantly higher than the premium rate for a freshly insured mortgage.
For the most security, it’s best to have a contingency plan in place. If your home sells first, consider a short-term rental or temporarily moving in with family or friends. If possession of your new home happens before the sale, consider “Bridge Financing”.
At the end of the day, there really is no right or wrong answer. Do what feels best for you and to come to the best conclusion, speak with your Realtor and Mortgage Broker as they have the experiences and knowledge that can better help you determine which options are best suited to your circumstances. Also, as they aren’t as emotionally invested, they could help provide different insight to your decision.
If you would like to discuss if you qualify to own more than one home, how much you qualify for based on the expected sale proceeds of your home, or if you have any other financing questions, please do not hesitate in contacting Minn Coates at 780-863-0700.