Buying a new home before the selling old one (insurance, loan, property tax)

[lesgram]

My wife and I are considering buying a new home. The list price is $175k and we would like to do approximately $75k in renovations before moving in. Our current home (valued at $140k) is paid off and we don't plan to sell until the construction is complete. Currently we only have around $20k cash on hand. Could someone explain to me how the loan process in this case would work? Would this be a construction loan? And will not having the 20% cash available as a down payment be an issue (we do plan to apply the money from the sale of our first home towards the new loan afterwards). Thanks.

[Pfhtex]

You want a Homestyle Renovation loan, wherein the loan is based on post-improvement value, thus hopefully thrusting you into an equity position that requires no Mortgage insurance, even after a smaller down payment.

Your property taxes and homeowners insurance, calculated monthly, will be added to your debts when calculating the debt ratio for the new place.

The question is: What kinds of improvements do you want to do to the new place? If they are not the most bang-for-bucks renovations, you would likely be looking at about a 10% cash down payment, negotiate such that the seller pays your taxes/insurance/closing costs on the new spot, and end up with a conventional loan wherein Mortgage Insurance, if any, would at least expire at some point.

So, what kinds of things do you want to do to the new place?

***Yes, you could always get a low-cost HELOC on the place you are moving out of. You can go to 70% of the home's value (not needed, but that's the guideline) if it has been for sale in the past six months, and you would have to pull it off the market during the refi process. I think you can avoid that, though.

[Aredhel]

Before you jump into this, remember you don't know how long it will take to sell your current home. Make sure you'll be able to pay the carrying costs (taxes, insurance, utilities) on both houses plus the mortgage on the new house indefinitely, lest you get yourself into a nasty financial bind!

[SmartMoney]

You don't say anything about qualifications. If you could purchase by doing a first and second loan.......you say about 75K in repairs, get your 2nd trust for that amount. Before you move, get a heloc on the current home say for 100K, assuming you qualify. Use the heloc funds for repairs. When current home is sold, the heloc gets paid in full and the rest of the proceeds pays off the 2nd loan on the new home you purchased. You are left with a single loan, not padded in rate for a construction loan and avoiding the need to refi in the future.

(Let me know if that doesn't make sense, its late and my eyes are crossing).

[lesgram]

Thanks for the advice. I am not familiar with the Homestyle Reno Loan, but will look in to that. My initial thought was to do as SmartMoney suggest and use a HELOC on our primary to make the upgrades to the new home, but was concerned with such little cash ($20K) to put down that we may not qualify for the loan on the purchase. That is, unless the lender will take in to account on the appraisal that we plan on upgrading the new home using our equity??

The home we're looking to purchase was built in 1920 so the repairs/upgrades will be used to bring it up to efficiency standards. I do acknowledge that these repairs could actually be closer to $100K when all is said and done. There is a comparable right next door (same sq.ft, year built, & style) that was redone and sold last year for $349K ($175 sq ft). Granted to meet the same interior quality, we may looking closer to $125K in upgrades/repairs.