Financing in 01453>Question Details

Kbarn, Both Buyer and Seller in Leominster, MA

Hello, I have seen a short sale opportunity in my desired area but our current home is worth less than we paid. Are there opportunities to roll over?

Asked by Kbarn, Leominster, MA Mon Jul 25, 2011

More specifically we were wondering if there are ways to use the equity from purchase of a short sale home if it is worth more than what we pay for it to offset the negative equity or amount owed on the mortgage of our current home if we sell for less than what we owe on our current mortgage. We have 2 young children and have more than grown out of our current home and I found a great home that would be perfect for our family that is a short sale, I would love to try the process if I thought I could have options to make it work. As of right now we feel stuck ! we have good credit and have been perfect making payments on our home for the past 5 years

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You're are of course assuming that you are going to get this Short Sale at the advertised price, how ever if the price is low, it is possible that the bank does not even know what the asking price is and the the Listing agent has merely advertised a teaser price to get offers! As for if you could short sale your home and buy a new one, that wouldn't happen either!
1 vote Thank Flag Link Mon Jul 25, 2011
Kbarn - if you can qualify for both the new payment and existing payment, then in theory you could purchase the new home and then sell your current home afterwards.

If there is sufficient equity in the new home after you purchase it, you may then be able to refinance to take cash out or get a 2nd mortgage in case refinances can't happen/doesn't make sense (and also assuming you can qualify for a 2nd mortgage).

Typically in order to use an appraised value that is higher than the purchase price on a cash out refinance you'll have to have owned the home for 1 year, but that isn't always the case (Fannie Mae & Freddie Mac do not have seasoning requirements to use a new appraised value, but many lenders impose 12 months), but you do have to meet the continuity of obligation requirement for cash out (which is 6 months from when you purchased it).

There is no requirement that says you can't purchase a new home and then short sale your old home either, and while that is what you are looking to avoid, it isn't illegal or prohibited. If you can't sell your old home then you may consider becoming a landlord and putting a renter in there until home value's rebound, or if things go well and you aren't taking a significant loss on the property then you may want to just continue having renters pay off that mortgage.

Have you looked into seeing if you can qualify for a new mortgage while you still have your current one? Is that something you'd even want to do?
1 vote Thank Flag Link Mon Jul 25, 2011

There are few things you could do but rarely would you end up with instant equity in a short sale purchase. There is a slight discount for the risk that is being assumed by the buyer but they sell for close to their market value.

You could rent your house and then be able to move forward. Most mortgage companies consider the obligation satisfied if the rent is 110% of the mortgage payment. That's just one thought - please give me a call if you want to hash out some ideas.

0 votes Thank Flag Link Mon Jul 25, 2011
In short (no pun intended), the answer is no. You can never use the excess equity in a home that you are purchasing towards closing costs, down payments, or used toward other debt obligations.

When a lender approves you for a mortgage, it will be based on a percentage of the loan amount against the purchase price or appraised value - whichever is lower.

Further, if you short sale your current home, you will be barred from another mortgage for at least 2 years (if going FHA). Lenders, however, can impose stringer time frames - meaning, your wait may even be longer.

Additionally, you need your lender's approval to short sale your home.

In order to be approved for a short sale, you have to meet certain requirements such as:

- you are unable to refinance or don't qualify for a loan modification
- you are behind on your mortgage payments
- you are facing financial hardship
- you owe more than your home is worth and
- you can not sell your home at a price greater than your mortgage debt.

If your lender feels that you are entering into a short sale simply to get out of your current home so you can purchase another one at a lower price, then they will not approve your request for a short sale.

You should speak with an attorney who is experienced with short sale transactions before contemplating such a move.
0 votes Thank Flag Link Mon Jul 25, 2011

You have no equity on the newly aquired property the value is the lesser of the sales price or appraised value. There is no equity to apply to the old loan.
0 votes Thank Flag Link Mon Jul 25, 2011
hi, Kbarn. A lot depends on what type of mortgage (i.e. FHA, FANNIE/CONVENTIONAL, VA) you currently have on your present home. If its CONVENTIONAL or VA, I would strongly suggest going FHA, since all you would have to do is show that your new home is considerably larger (i.e square footage, bedrooms), cost more, or better located (i.e. school system) to avoid (If a CONVENTIONAL MORTGAGE) putting more than 3.5% down and having 2-6 months mortgage reserves for both properties after closing costs, or (if its VA) paying up to 3.25% in admin fees for utilizing your certificate of eligibility a 2nd time. Same requirements and benefits apply if your current mortgage is FHA also. And remember: unlike Conventional, FHA loans are assumable. Given today's extermely low rates, that could prove to be a huge buyer incentive if you every put the home back on the market.
0 votes Thank Flag Link Mon Jul 25, 2011
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