Real Estate 101: A Move-Up Success Story

Problem Solving

Here's a bit of real estate wisdom for you:

Changing homes is much like changing jobs: Make sure you have the next one lined up before you leave the one you're in.

In this recent post, I wrote about the significant challenges that homeowners face when they attempt to upsize to a larger home in San Carlos, or anywhere on the Peninsula. Any of these reasons below could torpedo their dream of moving to a larger home in a better neighborhood:

• Increase in mortgage interest rates: Unfortunately, that wonderful 3% pandemic loan they currently have does not transfer over to a new property, so move-up buyers are borrowing at twice that rate.
• Increase in mortgage payments: Basic math tells us that a higher loan amount at a higher interest rate results in a significantly higher monthly mortgage payment.
• Increase in property taxes: Unless you're 55 or older and can transfer your tax basis via Proposition 19, the property tax on the new property will adjust to at least 1% of the purchase price.
• Pre-approval: It can be challenging for many buyers to get pre-approved to buy a new home because they already have a mortgage on the home that they live in (too much debt).
• Down payment: Most lenders require a minimum of a 20% down payment to secure a loan. That's a significant chunk of change for someone who has already sunk a ton of money to get their current home.

There's not much one can do to change the first three of these. Mortgage interest rates and property taxes are set by someone else, and there aren't any loopholes to get around those.

The last two, however, are fixable. The old way of handling this problem is was to require the homeowner to sell their current home before purchasing their new one. That removes the debt of the current mortgage for the pre-approval on the new loan (#4), and gives them the cash for the new down payment (#5).

But like I stated at the outset of this article, it's a risky move to sell your current house without knowing where you're moving, or even when. I recently found a very powerful way to help some eager homeowners get around that particular problem.

The Situation.

Recently, a young family enlisted my help to find them a larger property in San Carlos than the current home they occupy in San Mateo. They are both gainfully employed and could easily handle the new mortgage payments and the increased property tax. They even saved up a substantial down payment to fund the 20-25% needed for the new loan.

Before I met them, they had already gone through the pre-approval process with a large, institutional lender and were told that they qualified for a $2,750,000 purchase….but……they would have to sell their San Mateo home first, which, as we discussed, brings its own slew of hurdles.

Why did they have to sell first? Because lenders adhere to a metric called the debt-to-income (DTI) ratio when determining how much money they will loan to a borrower. As the term implies, they are simply comparing how much debt a borrower has versus how much income they earn, and they count the current mortgage as debt. Most lenders allow a max of 36%-40% DTI, and as a rule of thumb, the smaller that number is, the better.

So, if my buyers stuck with the lender they were pre-approved with, the road to upsizing was going to be a bumpy one.

The Solution.

I introduced these buyers to my lender, who just so happens to have three unique product offerings that are designed to help move-up buyers make that leap much more smoothly:

• “Buy Before You Sell”: In this incredibly simple and effective program, the lender removes the debt on the current home from the DTI calculation. Their reasoning is that the current home is going to be sold anyway, so it should not count in the longer-term debt calculation. The borrower just has to state in writing that they plan to sell their current house within a reasonable number of months after the purchase of the new house closes, or better yet, provide them with a copy of a valid listing agreement. The premise here is that the borrower can't keep the old property and rent it out.
• Bridge Loan: Bridge loans are not unique — many banks have them. A bridge loan is simply a short-term loan that is secured against the equity on the existing property, and is primarily used to provide extra cash for the down payment. What's unique about this lender's bridge loan is that it's nearly 1% cheaper than the average rate that other lenders offer.
• Asset Depletion Program: This program allows people who have substantial equity holdings to count those as income in the DTI calculation without having to liquidate the asset or take a distribution. This is great for people who have LOTS of money tied up in stock and equities, but maybe not that much income.

My lender ran the numbers for this family, and an entirely different scenario emerged. They were able to increase my buyer's pre-approval amount by a full million dollars to $3.75M by removing the debt on the current home. But far more importantly, they were approved for that amount without having to sell their San Mateo house first.

That was the game-changer.

Last week, we wrote a successful offer on their new home in San Carlos — an offer that would have never been accepted if there had been a contingency attached for the sale of their San Mateo home. And because the purchase price was below their max pre-approved amount, we didn't need to activate the bridge loan because they already had enough cash on hand for the down payment. But it was there if they needed it.

They close escrow on March 11, and now I can put their vacant and fully staged home in San Mateo on the market right after they move into their new home — a much better sequence of events.

Victory snatched from the jaws of defeat.

Key Takeaways.

If you're thinking of moving to a new home, it's far more convenient and much less risky if you can purchase and close on your next home before you sell the one you're living in. If your lender is telling you that you need to sell your current home first, there just may be a much better option for you.

The big-box institutional lenders are excellent at lending to the mainstream buyers, but most of them don't have creative solutions for those buyers who have unique needs and don't necessarily fit into that neatly defined box.

I do. Just reach out, and I'll fill you in. Problem solving…it's what I do.