Overcoming The Challenges Of Buying A Second Home When Your First One Is Still On The Market

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Life doesn't always go as planned. If you need to buy another home before your first one sells, you may be wondering whether it's possible to get approved for a second mortgage to purchase it. Mortgage companies make loans on second properties all the time. Whether you would qualify for another home loan, however, depends on your finances. Here's what you need to know to overcome this particular challenge.

Your Debt-To-Income Ratio

The first thing the lender will look at when deciding whether to approve a second mortgage is your debt-to-income (DTI) ratio. This is the amount of debt you have in relation to your income. For example, if you make $10,000 per month and your monthly payments amount to $3,000 per month, your debt-to-income ratio would be 30 percent.

It's commonly believed that a higher DTI means a higher risk of loan default. Therefore, lenders want borrowers to have DTIs that are as low as possible. Some experts recommend keeping your debt-to-income under 36 percent, but there are mortgage companies who will lend to people with DTIs as high as 43 percent.

Use a mortgage calculator to estimate what the monthly payments will be for the second home and add it to your existing monthly obligations to determine what your DTI will be with the additional mortgage. If the amount pushes your DTI over the limit, you'll need to either reduce your debt load or increase your income to compensate. For instance, pay off your car note or generate income by renting out your spare room. The lower you can get your DTI, the better your chance of securing financing.

Still Need a Down Payment

A second challenge you'll have to contend with is getting the down payment for the second home. Many people use the proceeds from the sale of their first homes to finance their second, but this option won't be available to you if your home is still on the market.

There are a couple of ways you can handle this problem. You can take out an equity loan on your current house if you have enough to cover the amount you need to put down. When you first home finally sells, you can simply pay off both debts.

The other option is to get a bridge loan. This is a temporary loan designed specifically for homeowners who are selling a home while buying another one at the same time. These loans are secured by your existing home, and one of the main benefits is you may not be required to make monthly payments on the note right away. However, these notes typically cost more than home equity loans.

Be aware, too, that either of these loans will add to your debt-to-income ratio, so be certain you'll still be under the limit if you take one out.

For more information about getting a second mortgage while selling your first home, contact a mortgage company.


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