9

I bought my first home last year; it's my primary (and only) residence. I intend to pay off the mortgage in 5 or 10 years, then sell the house and buy a bigger one. The new one would cost 2 to 3 times as much as my existing home, so I'd have to get a mortgage to buy it.

For a down payment on this second mortgage, I could simply continue living in my current home until I've saved up 20% for the new one. But this could take awhile.

A faster option would be to sell my current home and use the proceeds as the downpayment. But if I sell the home to get the cash, then of course I'd have no place to live until I close on the new home. And that could take months.

I'm wondering... Would a mortgage lender accept my current home in lieu of a cash down payment? The estimated value of the home could be used as a "pending" down payment, and when the home is eventually sold, the final sales price would be used as the actual down payment. Does this ever happen? If not, what is typical for this situation?

  • Where do you live? You might be subject to capital gains tax in the US since you only had the old house a year. – MrChrister Oct 7 '11 at 4:58
  • 1
    I live in northern California. As I stated in the question, I am not intending to sell the house now, only when it is paid off in 5 to 10 years. – vocaro Oct 7 '11 at 6:09
13

This is of course a perfectly normal thing to happen. People trade up to a bigger house every day.

When you've found a bigger house you want to move to and a buyer for your existing one, you arrange 'closing dates' for both i.e. the date on which the sale actually happens. Usually you make them very close, either on the same day or with an overlap of a few weeks. You use the equity (i.e. the difference between the house value and the mortgage) in the old house as the down payment on the new house. You can't of course use the part of the old house that is mortgaged.

If the day you buy the new and sell the old is the same, your banks and lawyers do everything for you on that day. If there is an overlap then you need something called 'bridge financing' to cover the period when you own two houses. Banks are used to doing this, and it's not really that expensive when you take into account all the other costs of moving house. Talk to them for details.

As a side note, it is generally reckoned not to be worth buying a house if you only intended to live there one or two years. The costs involved in the process of buying, selling and moving usually outweigh any gains in house value. You may find yourself with a higher down payment if you rent for a year or two and save up a down payment for your 'bigger' house instead.

  • You describe a common thing, I don't think this is what was asked though. This got accepted, so perhaps I didn't understand the question. The comment about selling in the future is my point of confusion. – MrChrister Oct 7 '11 at 15:42
  • Bridge financing was the answer I was looking for. Perhaps I could have been clearer in my question by describing a hypothetical case in which a person already owns the home (to avoid confusion about me not selling until the mortgage is paid off). – vocaro Oct 7 '11 at 18:15
8

What you're looking at is something called "Bridge-Financing". Essentially, it allows you to borrow your down-payment from the bank, using your old home as collateral. The interest rate varies, but if you get the bridge from the same institution as your new mortgage, they will often be a bit flexible.

You take possession of the new home, and begin mortgage payments on it normally. When the old home is sold, the bridge is paid off.

Note that the deposit on signing for the new house will still have to be cash.

All bets are off if you are talking about a NEW new home, as builders usually require advance payments during the build.

6

I know you've clarified that you're in the US, but in case anyone else comes across this question: in the UK this is completely normal (including if you still have outstanding mortgage on your current home). We end up with long "chains" of buyers and sellers all completing / moving on the same day so that the proceeds from one sale can be used as the downpayment on the next.

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.