Two-steps moving from one house to another? How to finance?

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siamond
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Two-steps moving from one house to another? How to finance?

Post by siamond »

We are considering buying a new house, but not put the existing one for sale for a period of time (e.g. 6 months to a year). I know, not financially optimal, but with the type of house we're seeking, plus some work constraint for my wife, we may need such flexibility.

We have relatively little experience about house buying in the US (we bought ours 20 years ago in a bit of a rush, that's it; fully paid by now).

How would that work? We can easily put a 20% down payment, but we would need a (possibly quite long) bridge loan of sorts until we (successfully) put the old house for sale. And we're mostly retired, hence not little wages to leverage.

*** EDIT: we're now thinking to move faster, so we would need a bridge of 1 to 3 months max.
Last edited by siamond on Tue Jul 13, 2021 2:25 pm, edited 1 time in total.
stan1
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Re: Two-steps moving from one house to another? How to finance?

Post by stan1 »

Some ideas to create liquidity:
- HELOC on first house
- asset based mortgage on new house
- sell investments in a taxable account and re-buy when first house is sold
- 401K loan(s) (may not apply if you are not working)
Nyc10036
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Re: Two-steps moving from one house to another? How to finance?

Post by Nyc10036 »

siamond wrote: Sat Jun 12, 2021 5:06 pm We can easily put a large down payment, but we would need a (possibly quite long) bridge loan of sorts until we (successfully) put the old house for sale. And we're essentially retired, hence little wages to leverage.
You can still get a mortage based on income where your income is what you are living on in your retirment.
Tracker968
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Re: Two-steps moving from one house to another? How to finance?

Post by Tracker968 »

I just talked to a mortgage banker, and was told that I could qualify for a mortgage where the sum of mortgage payment, property tax, and home insurance was 43% of my gross pension payment. Assuming no other debt.
terran
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Re: Two-steps moving from one house to another? How to finance?

Post by terran »

If you have a large taxable account you could consider a margin loan of a small percentage of the total value. It's best not to take a loan on too much of the total balance because you can be forced to liquidate at in inopportune time if the market crashes and your loan to total balance ratio becomes too high. Interactive brokers supposedly has low rates.
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siamond
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Re: Two-steps moving from one house to another? How to finance?

Post by siamond »

Nyc10036 wrote: Sat Jun 12, 2021 8:05 pm You can still get a mortgage based on income where your income is what you are living on in your retirement.
Tracker968 wrote: Sat Jun 12, 2021 8:44 pm I just talked to a mortgage banker, and was told that I could qualify for a mortgage where the sum of mortgage payment, property tax, and home insurance was 43% of my gross pension payment. Assuming no other debt.
We have solid savings, mix of taxable accounts and IRAs, but no pension nor SS yet, we're early retired. From the little I know, it appears that mortgage bankers don't trust this kind of situation, even though we're perfectly fine with it...
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siamond
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Re: Two-steps moving from one house to another? How to finance?

Post by siamond »

stan1 wrote: Sat Jun 12, 2021 5:36 pm Some ideas to create liquidity:
- HELOC on first house
- asset based mortgage on new house
Thank you, after taking a brief look, those two avenues do seem like a possible match for our situation.
stan1 wrote: Sat Jun 12, 2021 5:36 pm - sell investments in a taxable account and re-buy when first house is sold
- 401K loan(s) (may not apply if you are not working)
401k doesn't apply (retired, 401k $ are now in IRAs). Selling a house-worthy chunk of taxable account would trigger a massive tax bill, I'm afraid. Not keen on doing so.
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siamond
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Re: Two-steps moving from one house to another? How to finance?

Post by siamond »

terran wrote: Sat Jun 12, 2021 8:50 pm If you have a large taxable account you could consider a margin loan of a small percentage of the total value. It's best not to take a loan on too much of the total balance because you can be forced to liquidate at in inopportune time if the market crashes and your loan to total balance ratio becomes too high. Interactive brokers supposedly has low rates.
Hm. I had no idea there was such a thing. Thank you for the pointer.
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RickBoglehead
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Re: Two-steps moving from one house to another? How to finance?

Post by RickBoglehead »

siamond wrote: Sat Jun 12, 2021 9:45 pm
Nyc10036 wrote: Sat Jun 12, 2021 8:05 pm You can still get a mortgage based on income where your income is what you are living on in your retirement.
Tracker968 wrote: Sat Jun 12, 2021 8:44 pm I just talked to a mortgage banker, and was told that I could qualify for a mortgage where the sum of mortgage payment, property tax, and home insurance was 43% of my gross pension payment. Assuming no other debt.
We have solid savings, mix of taxable accounts and IRAs, but no pension nor SS yet, we're early retired. From the little I know, it appears that mortgage bankers don't trust this kind of situation, even though we're perfectly fine with it...
Asset based mortgage. Total assets /120 = income. 43% is max debt.
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Watty
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Re: Two-steps moving from one house to another? How to finance?

Post by Watty »

siamond wrote: Sat Jun 12, 2021 5:06 pm (e.g. 6 months to a year).
There are ways to do this but most often people only need to a couple of weeks or maybe a month or two to juggle the sale.

I was trying to figure out why you would need to do this and other than having a house built for you I could not think of why you would need to do this. If you are having a house built then that is a special situation and all the money will not be needed at once.

If you can explain why you need to do this you might get better suggestions.

You should really reconsider since owning two homes at once can backfire on you the housing markets and interest rates may have changed and you could end up trying to sell your current house in a very different housing market.

I would really look at trying to figure out some way to sell your current house and rent something until you can buy and move into your next house.
mrb09
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Re: Two-steps moving from one house to another? How to finance?

Post by mrb09 »

Just as an example, not necessarily the best way:

- We were in the market for a new house, so I sold some mutual funds in my taxable account for a down payment, and took a hit on capital gains.
- We found a house we liked, and took a 30 year conventional loan with a 20% down payment.That used my mutual fund sale and most of our cash reserves. I had to write a letter to the mortgage company where the down payment came from.
- When we getting ready to sell our old house, we needed some extra money for some cosmetic improvements, and we were out of cash due to the down payment of the new house, so I got a margin loan to pay for the improvements.
- Our old house is in escrow (purchased within two weeks on the market), and when it closes we can pay back the margin loan and pay off the mortgage for the new house.

A little riskier than I would have preferred, but still on track to look good. We were a month or so between the new house purchase and the old house sale, not sure if I would be as comfortable with a planned 6 months gap, although we were prepared for it.
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Re: Two-steps moving from one house to another? How to finance?

Post by Padlin »

I'm in the same situation, retired, no income. Tried to get a home equity loan, bank turned us down due to lack of income, didn't care what my various accounts had in them. I do not have enough in non iras to do the job, close, but not enough.

We're thinking we have to sell, rent, then buy. New is 1000 miles away from current.

Never heard of an asset based mortgage.
Regards | Bob
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Re: Two-steps moving from one house to another? How to finance?

Post by chemocean »

I contacted a larger national mortgage company (Wells Fargo, I think) about asset based mortgage for IRA assets. The rep said that such mortgages are possible. For IRA accounts, they use a 30 year withdrawal rate (assets/360) to get IRA based monthly income. This income amount is consistent with the first RMD at age 72.
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Re: Two-steps moving from one house to another? How to finance?

Post by stan1 »

Padlin wrote: Sun Jun 13, 2021 7:46 am I'm in the same situation, retired, no income. Tried to get a home equity loan, bank turned us down due to lack of income
Try different lenders, including a mortgage broker.
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Re: Two-steps moving from one house to another? How to finance?

Post by stan1 »

siamond wrote: Sat Jun 12, 2021 9:52 pm
stan1 wrote: Sat Jun 12, 2021 5:36 pm Some ideas to create liquidity:
- HELOC on first house
- asset based mortgage on new house
Thank you, after taking a brief look, those two avenues do seem like a possible match for our situation.
stan1 wrote: Sat Jun 12, 2021 5:36 pm - sell investments in a taxable account and re-buy when first house is sold
- 401K loan(s) (may not apply if you are not working)
401k doesn't apply (retired, 401k $ are now in IRAs). Selling a house-worthy chunk of taxable account would trigger a massive tax bill, I'm afraid. Not keen on doing so.
You don't have to pick just one. You can pick several or even all.
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Re: Two-steps moving from one house to another? How to finance?

Post by galawdawg »

RickBoglehead wrote: Sat Jun 12, 2021 11:20 pm
siamond wrote: Sat Jun 12, 2021 9:45 pm
Nyc10036 wrote: Sat Jun 12, 2021 8:05 pm You can still get a mortgage based on income where your income is what you are living on in your retirement.
Tracker968 wrote: Sat Jun 12, 2021 8:44 pm I just talked to a mortgage banker, and was told that I could qualify for a mortgage where the sum of mortgage payment, property tax, and home insurance was 43% of my gross pension payment. Assuming no other debt.
We have solid savings, mix of taxable accounts and IRAs, but no pension nor SS yet, we're early retired. From the little I know, it appears that mortgage bankers don't trust this kind of situation, even though we're perfectly fine with it...
Asset based mortgage. Total assets /120 = income. 43% is max debt.
I believe there are other qualification options available as well for asset-based mortgages. Loans backed by Fannie Mae and Freddie Mac use investment and retirement assets towards the income requirements. Their formula takes 70% of qualifying assets (investments and retirement accounts) and 100% of cash holdings and divides it by the number of months in the loan product (one hundred eighty on a fifteen year mortgage, three hundred sixty on a thirty year mortgage) to determine your "monthly income" which they then use according to their standard underwriting requirements to determine your maximum payment and loan amount.

If you have $2 million in investments (retirement and taxable), you can count up to $1.4 million divided by the number of months of the mortgage as your monthly income. So for a fifteen (15) year loan, that would be equal to a monthly income of $7,777. For a thirty (30) year loan, that would be $3,888 counted as monthly income. Cash holdings are not discounted. Divide cash by the months of the loan and add that to the numbers above. That total would be your "monthly income."
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siamond
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Re: Two-steps moving from one house to another? How to finance?

Post by siamond »

stan1 wrote: Sun Jun 13, 2021 8:47 am
siamond wrote: Sat Jun 12, 2021 9:52 pm
stan1 wrote: Sat Jun 12, 2021 5:36 pm Some ideas to create liquidity:
- HELOC on first house
- asset based mortgage on new house
Thank you, after taking a brief look, those two avenues do seem like a possible match for our situation.
stan1 wrote: Sat Jun 12, 2021 5:36 pm - sell investments in a taxable account and re-buy when first house is sold
- 401K loan(s) (may not apply if you are not working)
401k doesn't apply (retired, 401k $ are now in IRAs). Selling a house-worthy chunk of taxable account would trigger a massive tax bill, I'm afraid. Not keen on doing so.
You don't have to pick just one. You can pick several or even all.
Good point! Now I better understand your taxable account suggestion...
galawdawg wrote: Sun Jun 13, 2021 9:04 am[...] I believe there are other qualification options available as well for asset-based mortgages. Loans backed by Fannie Mae and Freddie Mac use investment and retirement assets towards the income requirements. Their formula takes 70% of qualifying assets (investments and retirement accounts) and 100% of cash holdings and divides it by the number of months in the loan product (one hundred eighty on a fifteen year mortgage, three hundred sixty on a thirty year mortgage) to determine your "monthly income" which they then use according to their standard underwriting requirements to determine your maximum payment and loan amount.

If you have $2 million in investments (retirement and taxable), you can count up to $1.4 million divided by the number of months of the mortgage as your monthly income. So for a fifteen (15) year loan, that would be equal to a monthly income of $7,777. For a thirty (30) year loan, that would be $3,888 counted as monthly income. Cash holdings are not discounted. Divide cash by the months of the loan and add that to the numbers above. That total would be your "monthly income."
Thank you, I appreciate the concrete example.
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Re: Two-steps moving from one house to another? How to finance?

Post by siamond »

Back to this. I asked a couple of lenders to give us a pre-approval, plus the exact terms of a bridge loan. And well, this isn't exactly satisfying. First, there is no such thing as a bridge loan any more, so we would need to take a full-size home mortgage for just a couple of months, and then repay it. Interest rate isn't bad (2.5% to 3%), but this comes with a host of direct and indirect fees (e.g. lender fees, appraisal fees, 1yr of prepaid insurance; escrow account for property tax & insurance; can't repay the loan before a 6 months period; etc). I might be able to get slightly better terms by shopping around, but this seems a poor fit for our needs. And then to please their 43% algorithm, we would need to put in place a sizable auto-withdrawal from a Roth-IRA, undoing some of our past Roth conversions...

So I came back from some of the ideas identified in this thread, notably those two line items:
stan1 wrote: Sat Jun 12, 2021 5:36 pm Some ideas to create liquidity:
- HELOC on first house
- asset based mortgage on new house
We can actually get some money tax-free from another source (family) to cover the down payment. Then an HELOC on our first house could add more room, but the bulk of the borrowing would come from a Line Of Credit against our (fairly sizable) brokerage account at E*Trade. I just called them and here are my notes:
- We can borrow at ~2.9% APR (variable) with no extra loan fees (ah… so good).
- Exact max amount is a function of asset types, E*Trade looked at it and quantified at roughly 2/3rd of our current balance
- If the account balance drops suddenly, we may need to replenish within 3 biz-days to fulfill the previous constraint; Web portal allows to monitor the situation and warn us in advance when things are getting borderline
- Replenish can be done by a wire transfer => I need to check with Vanguard if they can do it fast out of Roth-IRAs as last level of security, but better borrow up to (2/3rd of max) to foresee a big drop of stock market (ala March 2020)?
- Sure, we would still need to pay for title insurance and things like that, but a bunch of fees from mortgage broker would be eliminated
- Beware: during the loan, we shouldn't tap the brokerage account very much for ongoing expenses (e.g. moving/etc)
- The sum of HELOC + E*Trade LoC + family money does add up to cover our buying target
- E*Trade LoC can be put in place within days (HELOC would need to be ready ahead of time), allowing us to make a fast cash-only offer to sellers, who tend to like that!

I do understand that it is a little unsettling to borrow against a brokerage account (stocks-only; our bonds are in an IRA, from which we can't borrow), but it seems to me that we would have enough maneuvering room, even in case of deep crisis. Thoughts? Anything I am missing?
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Re: Two-steps moving from one house to another? How to finance?

Post by qwertyjazz »

Get a no cost mortgage at 4-5% - let them eat the fees - you are planning on closing it out in only a few months
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Re: Two-steps moving from one house to another? How to finance?

Post by presto987 »

qwertyjazz wrote: Tue Jul 13, 2021 4:04 pm Get a no cost mortgage at 4-5% - let them eat the fees - you are planning on closing it out in only a few months
This is a very good idea. A mortgage with an interest rate in the 3-4% range may do the job.

In other words, you want to get lender credit, i.e. negative points. The lender will give you a credit against your fees in exchange for your taking a higher interest rate. Many but not all lenders will offer this. Zillow Mortgage is a good place to search for lenders who offer large lender credits (select "no fees no points" in the advanced filters), unless you have a jumbo in which case you should contact the big retail banks like BofA.

Costs like prepaid insurance and an escrow account aren't fees. They are items that you would pay anyway if you own the house. And if you sell the house, the insurance company should refund a pro-rated portion of the premium (and the buyer should pay a pro-rated share of the property taxes).

The good thing is that some lenders will allow you to increase your lender credits so that even your prepaids and escrow account are covered by the credits. Effectively this means that if you pay off your mortgage after a few months, you can actually make money. I've refinanced my mortgage 3 times in the last year and made $30k -- net of all mortgage fees -- using this strategy. It is true that I am also paying an above-market interest rate in order to make this happen, but that has only amounted to a couple thousand dollars so far, and my interest rate is now back to where it started.
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Re: Two-steps moving from one house to another? How to finance?

Post by presto987 »

Notwithstanding the strategy I outlined in my post above, I do think that the combination of HELOC, E*Trade LoC + family money may be more straightforward for you, and gives you the benefit of being able to make a cash offer.
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Re: Two-steps moving from one house to another? How to finance?

Post by siamond »

presto987 wrote: Tue Jul 13, 2021 7:41 pm
qwertyjazz wrote: Tue Jul 13, 2021 4:04 pm Get a no cost mortgage at 4-5% - let them eat the fees - you are planning on closing it out in only a few months
This is a very good idea. A mortgage with an interest rate in the 3-4% range may do the job.
I was actually exploring such a no-fee mortgage approach before I figured out the brokerage line-of-credit approach, but there are more fees than the lender's fees which are a waste of money (e.g. appraisal cost, credit report fee, lender's title Insurance). Admittedly, this isn't the bulk of it, it just annoys me... That, and the painful requirements about faking income (e.g. Roth-IRA auto-withdrawal).
presto987 wrote: Tue Jul 13, 2021 7:41 pm In other words, you want to get lender credit, i.e. negative points. The lender will give you a credit against your fees in exchange for your taking a higher interest rate. Many but not all lenders will offer this. Zillow Mortgage is a good place to search for lenders who offer large lender credits (select "no fees no points" in the advanced filters), unless you have a jumbo in which case you should contact the big retail banks like BofA.

Costs like prepaid insurance and an escrow account aren't fees. They are items that you would pay anyway if you own the house. And if you sell the house, the insurance company should refund a pro-rated portion of the premium (and the buyer should pay a pro-rated share of the property taxes).
Agreed with prepaid insurance and escrow not being actual losses. It's just frustrating to see lenders create totally artificial needs for such liquidity (8 months of full property taxes in escrow, ah, come on). And of course, they invest the money in the mean time and you don't... sorry, just venting! :shock:
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siamond
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Re: Two-steps moving from one house to another? How to finance?

Post by siamond »

presto987 wrote: Tue Jul 13, 2021 7:43 pm Notwithstanding the strategy I outlined in my post above, I do think that the combination of HELOC, E*Trade LoC + family money may be more straightforward for you, and gives you the benefit of being able to make a cash offer.
Yes, I like the straightforward nature of this approach. Sure, if the market tanks 80% in 2 months, we're in troubles, but it seems a little silly to plan for such Armageddon... The March 2020 scenario seems a good yard stick of what to realistically protect against.

The debt-to-income ratio (e.g. 43%) will continue to apply to qualify for the HELOC though. Since we would initiate the HELOC *before* the E*Trade LoC (without really borrowing until we need it to), the 43% debt-to-income ratio will be easy to fulfill.

Now I am making a big assumption, which is that the E*Trade LoC uses the brokerage account as collateral and it should NOT require the 43% debt-to-income limit? That true? I guess I should call E*Trade again to clarify.
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Re: Two-steps moving from one house to another? How to finance?

Post by is50xenough »

Tracker968 wrote: Sat Jun 12, 2021 8:44 pm I just talked to a mortgage banker, and was told that I could qualify for a mortgage where the sum of mortgage payment, property tax, and home insurance was 43% of my gross pension payment. Assuming no other debt.
Was that Wells Fargo?
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siamond
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Re: Two-steps moving from one house to another? How to finance?

Post by siamond »

siamond wrote: Tue Jul 13, 2021 11:01 pmNow I am making a big assumption, which is that the E*Trade LoC uses the brokerage account as collateral and it should NOT require the 43% debt-to-income limit? That true? I guess I should call E*Trade again to clarify.
Well, this isn't 100% clear. E*Trade themselves does not run such a debt-to-income test in their application, all they care about is good credit score and the securities being used as collateral. But they aren't too sure if the underlying underwriter does run a debt-to-income test. Seems that I will have to to apply and see what goes; if I get rejected, then I can set up a Roth auto-withdrawal and try again... A bit unnerving to do while in a home purchasing situation... :shock:

Also any kind of withdrawal (to the notable exception of dividends distributions) will be frozen from the account being used as collateral. It seems to me that it would be wiser to split in two separate brokerage accounts then, one for collateral (the bulk of the $) and one for liquidity (foreseeing either big personal issue or deep market crisis requiring to move all securities to the collateral account), which is easy to do with E*Trade. While using a separate bucket of money for regular liquidities (including closing costs, moving costs, etc).
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Re: Two-steps moving from one house to another? How to finance?

Post by LilyFleur »

I was in a five-house deal once, with the first domino in the row being a real laggard. We negotiated a rent-back period from our buyer. With the market as hot as it is, if the buyer really likes your house, maybe they would be open to that.
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Re: Two-steps moving from one house to another? How to finance?

Post by ctfish »

LilyFleur wrote: Wed Jul 14, 2021 12:58 pm I was in a five-house deal once, with the first domino in the row being a real laggard. We negotiated a rent-back period from our buyer. With the market as hot as it is, if the buyer really likes your house, maybe they would be open to that.

So you get your house sale proceeds (say 300k) today, then pay rent ( 2k ) for a few months, but can use the proceeds on your new house? Cool.
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Re: Two-steps moving from one house to another? How to finance?

Post by LilyFleur »

ctfish wrote: Wed Jul 14, 2021 7:35 pm
LilyFleur wrote: Wed Jul 14, 2021 12:58 pm I was in a five-house deal once, with the first domino in the row being a real laggard. We negotiated a rent-back period from our buyer. With the market as hot as it is, if the buyer really likes your house, maybe they would be open to that.

So you get your house sale proceeds (say 300k) today, then pay rent ( 2k ) for a few months, but can use the proceeds on your new house? Cool.
Yes, the house is sold. You get your money. You rent from the new owners. There is a written agreement.

It has been a while since this happened, but I would think it could be negotiated. When we did it, our real estate agent said the rent is usually in the amount of the new buyer's payment.

It is a seller's market.
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