Welcome to the all things home podcast with Tina Beliveau.
I am here today with a special guest and his name is Danny Reedy. Danny is a really, really great lender with Alcova Mortgage. Do you want to say hi, Danny? Hi, everybody. Thank you, Tina, for having me. Yeah. By the way, you have the honor of being the very first guest on this podcast, don't don't let us down. No pressure. No pressure. Setting the stage. Yeah. Yeah.
Today's topic is how to buy a new home when you haven't sold your current home yet. And the reason we are talking about this is this is the most complex type of real estate move, in my opinion. There are many moving parts. There's way more on the line of, quote, kind of as I say, getting it all right, having things be smooth for both aspects, for being able to actually get the house you want and having all the strategies possible at your disposal, which is what we're about to talk about. And also to put yourself in a situation where your plan for your current home is solid and financially sound and that you've also chosen the best option for that, because there are many ways to set yourself up for success. And we're going to give you a lot of tips along the way.
Feel free to make notes. But if you have specific questions as this relates to your situation, reach out to us. We are glad to talk to you long before you're ready to make a move. I feel that's one of the most common things. Sometimes people come to me and say, I'm not ready yet. Is it OK to get your advice? And my response is always, oh, my gosh, I would much rather prepare you now and give you everything you would need than have you in a situation where you're kind of making a decision under the gun and just feeling 10 times more stress than you needed to. And I think this is also important in today's market climate because we are continuing in these historically low inventory times, which means this is the first time in my 20 year career that I've had many people on what I call a very slow roll house hunt, where maybe you're tracking a neighborhood or area where there's only a few homes per year. And it just sometimes it takes longer or clients are choosing to take their time more, which is great. The only downside to the slow roll method is sometimes it can be kind of out of sight, out of mind to prepare yourself.
If you're one of those people, we want to unpack five different ways that you can buy a new home without having sold your current home. I'm going to take a breath. Is there anything you want to add, Danny, before we get into our five tactics? No, just that I haven't heard the slow roll explained. And I and I never heard that before. You definitely hit the nail on the head. The market has felt different. And I think you just summarized that extremely well. Yeah, I'm going to use that in the future. That's a good summarization. All right. Well, thank you for that. OK, it's funny. There's five ways to do this big picture ways.
There's a lot of offshoots and sub tactics and even ways to layer these strategies together. We're not going to get into any of that. It's very confusing. And ultimately, every person's situation is different depending on your income, your debt ratio, whether you're W-2, whether you have self-employment income. This is where, you know, I always say early on again, it's good to talk to a lender. It's not going to impact your credit score to have a consultation. Don't be afraid to do that. Basically, we just want to give the high level. And, you know, there's what I call option zero before we even get into the other five options, which is buying a new home with a home sale contingency, which is a protection for you.
If you were to find a new home that you want to buy and live in and the seller is willing to give you time and the benefit of trying to sell your house and only having to move forward with buying their house, if you definitely sell your house, that is something that happens. We actually just had a client do a home sale contingency and secure her dream home kind of out of nowhere. And Danny made all of that happen, by the way. But we were lucky. It was an off-market situation where he didn't need to list or move for about 45 days.
For him, he was just open to giving them a little time to sell their house. And then we painted a very clear and compelling picture to him of why it would be no problem and how quickly it will be done. And from our first contact with him to when both homes were fully under contract, it was 10 days. It was a whirlwind. The downside is most sellers aren't interested in that level of risk, that level of complexity. They know that if they put their house on the market at a realistic price, they might have 5, 10 or 20 offers to choose from if we're talking about really prime neighborhoods throughout our area, and then they just don't have to deal with that. If a home sale contingency is on the table, we are all for it. We'll make it happen.
It's pretty easy to feel out the other side and see if they're up for it. But if they're not, then we need to look at all the ways that you can buy without a contingency. That's where I'm going to kind of turn the mic over to Danny, and he's going to start with the first tactic. Yeah. The very first thing that we look at when we're talking to a client is we know the home sale contingency is off the table in that situation. And we say, okay, let's look at the overall financial picture. What is, what is it saying? And there's a couple of things that we're looking at.
Primarily it's the question is, can you qualify carrying both mortgages? Meaning you have a mortgage on your credit report now, and you have it hurting what's called your debt to income ratio. And this is how all mortgages are evaluated. It's one piece of the puzzle. It's a ratio based on your gross income and how much debt you can have or how much payment you can take on. If, if the, if the client qualifies and their DTI can carry it, but they have a lot of income or they just have small debt, they can carry both. Great. We've now hit the DTI and we're good to go.
They can buy based on their ability to repay or the debt to income ratio. Then the next question is what about sourcing the cash? Well, if they can source the cash and their DTI, they're good to go and they don't have to worry about the home sale contingency, but they just have to be able to stomach any risk that if their home doesn't sell, which doesn't really happen a lot, then they might carry to mortgage payments. I would say the very first thing we're evaluating is can you carry both? Yes or no. Now from there, it kind of goes, yes, I can carry the DTI, but no, I don't have the cash. This is very common, but I'm going to start with, no, I can't carry the DTI.
We have to have a solution for the clients who can't qualify with both payments. The very first and the easiest solution is if they intend to rent their home out. There's a qualification or there's a provision that if you're going to rent your house out and you can get a signed lease, which is 12 months and a security deposit, we can actually use that lease to offset your current monthly payment. You know, if you got your, your mortgage payment and then you get a lease, it'll offset and that'll kind of cover that part of the DTI if you intend to rent your house out.
But if you don't intend to rent the house out, then the only other solution for, for buying that house and it not hurting your DTI, there's probably a couple, but I'll say this is the most common is there's third-party companies, right? There's a third-party company that comes in, they're called Calc. They basically say, okay, Fannie Mae and Freddie Mac, and these are the agencies that kind of govern how loans are done and qualified, they'll come in and they'll make an offer on your house and they'll write an offer and there'll be no contingencies on it. And they will say, look, we'll buy your house if it doesn't sell. And then we can use that offer to offset your, your monthly payment again. Now the caveat is this, the company Calc, they're not really interested in buying your house. They want you to sell your house and they want to keep it. They're going to make money because they're going to charge a fee for doing this, but they will legitimately buy the house if it does not sell in a set amount of time for their offer price. That's just kind of a third-party company. That's honestly, I've been doing this 10 years.
It's a kind of a newer thing because many clients are rate locked or they just are equity locked. Rate locked being their rates are low and the new rates are higher or the equities in the house and we have to transfer it. They saw an opportunity and they basically built a business model around it. I believe to date they've done this a lot. They've never had to buy a home. That's kind of, that's wild. Yeah. Yeah. Danny, can I cut in and say something? I just want to, for people listening to this, the third party offer is great for someone who is really, really risk averse, where you want to know, no matter what. Someone's going to buy my house. I'm not going to be stuck with it. And I'm going to pay a little bit in this premium fee that they charge to know that I don't have to worry about it. On the flip side, if you can qualify for both mortgages at once, you're obviously taking on way more risk. You need to pay both of those mortgages at the same time. You can't pay both mortgages until, you know, one or both homes are sold at some point.
This is where our team jumps in and has a very fast action plan to sell your house on the backend. And part of why I'm probably preaching to the choir, because if you're listening to this, you're in the Bellevue group network, but part of why it's important to work with an agent, who's really looking out for your best interests and knows what they're doing is we do an analysis on your house and give you a best case scenario, but also a worst case scenario of what it's That you at least know if you're going into a situation where you're going to carry the mortgage on your prior home, you have a very clear idea from us of what it's really going to sell for on the backend versus pie in the sky numbers that people sometimes get from agents and also how many months you're probably going to have to carry that mortgage and for buyers to be competitive in today's market, this tech, we will never make anyone do this.
We'll never talk you into doing something you don't want to do, but a lot of people do this. It's just a matter of having all the numbers, all the timelines clearly communicated to you, but also written down you can really understand what that's going to look. And we have many, many clients who choose to do that once they feel the picture is clear and that there's just a level of comfort with what it's going to really entail. I'll give it back to you, but for anyone who's wondering which way to go, those are kind of the two most common that we're seeing. Yeah. And, and, and that is very crucial because the, the program you said, it can be seen as risky, but when you're working with a really talented agent yourself and your team, what we're doing is we're analyzing, Hey, this is the offer they're making. And we're communicating with you and saying, okay, that's the lowest that they think they're going to go. And then we're coordinating the effort together. Calc wants talented agents selling the home.
And it's less risk working with you than it is probably other agents who maybe aren't as thorough. And we just have to put a good action plan together, but it's really designed for people that really just can't get approved without it. We're trying everything on the front end to figure out any other methods to get them approved. And that's why I kind of go back into, okay, let's say client can get approved, they can carry the new mortgage, but then they don't have the equity. The same rules apply. We're trying everything first, first, we're going to have a conversation about, can we borrow money from a 401k or four or three B or IRA temporarily to bridge the gap and then client sells their home and then repays their investment vehicles.
Can they get a gift from, from mom, dad or uncle or grandparent or brother, whatever, can they get a gift that, that then they can work out and can't technically, they can't technically be alone. It has to be a gift on the lending guidelines, but we're looking at every option before we get to these other options. And, and a lot of times as we start down this path with a client, they start to realize, oh, I didn't know I could do that. And suddenly we, we have something that's actually actionable. And we can make something work with that. But the most common thing, and I would say I do this. I don't even know I've done this many times. And my favorite thing is the recast, the recast. People don't know about recast.
This is probably the mic drop of the whole podcast. Let's, let's go into the recast. This is the word to write down. Listen, yeah, recast is probably by far the most common thing. It's my favorite above and beyond before, you know, before I really knew that this might be an issue going into the market. I didn't do it. I didn't recommend it as much. And now it's probably a topic in 75% of my conversation. Let's say you have own a home and you have equity in that home and you want to buy a new home, but you want to use that equity, but you don't want to be home sale contingent. What we're going to do is we're going to see if you qualify with a minimum down payment or whatever down payment you do have access to.
And we're going to talk about different ideas for that. The client is then going to either meet the minimum down payments or put down whatever they do have. They're going to buy that new house. And then when they sell the house, they're going to call it the mortgage company and say, hi, I have whatever amount, call it a hundred thousand dollars. I would to apply that onto my loan and I would to recast it. And the reason that's important is because if a client wires a hundred thousand dollars to their current mortgage company right now, they're not going to change the payment. What they're going to do, it's called a principal curtailment.
All they're going to do is you're going to owe less on your loan and you're going to shorten your loan, but your payment's going to stay the same. That's just a regular, just principal curtailment. You're just applying principal to your mortgage, but a recast is totally different because a recast is actually a formal loan modification where instead of shortening the time, it kind of restarts it and it's, it changes your payment and can remove PMI as if you put that money back. PMI is private mortgage insurance for anyone who doesn't know that acronym. Sorry about that. Oh, no, it's fine. It can remove that and it's going to change your payment as if you put that money down to begin with. If client calls me, it says, Hey, I've amassed $300,000 in equity in my house. I have $50,000 in my savings account, but I don't want a loan that, that is $800,000.
I want a $500,000 loan and, and I, and I have the money in my house and I have to buy something, then we'll discuss the recast we're going to, as long as they qualify with their debt to income ratio, and we explore all the ways that that can happen, then what we're going to do is they're going to have a payment that they originally didn't want temporarily until they sell their house to, and then we're going to, they're going to apply the loan and most mortgage companies calls it, it costs about $250. A lot of people, they bring up the idea of Oh, we're just going to refinance it when we get the money.
Well, the refinancing is going to be more expensive than the recast. And yeah. Thousands more, right? Just for context, assuming rates are the same and not worse, which is just, you know, a coin toss. Yeah, exactly. You're just going to get into a new loan and you need the rates to go down. Now, some clients that I've taken through did was planning on doing the recast, but then we had a little rate drop last, I want to say October where they took advantage of just a refinance. They had the money. All right, I'll just refinance. Yeah. And other clients decided they wanted to do the recast. And then when they got the money, they said, you know what? I don't hate the payment. I'm just going to wait a little bit longer and then maybe we'll refinance.
And then other clients are just calling me right away. Hey, I want to recast. I just got the money. And it doesn't matter either way. You can always, and even after you recast, you can still refinance. You're not really limited, but it is by far my favorite option and has been, it's helped many clients. I mean, many, many clients. Cause you know, how prices go up and things get more expensive.
I don't want to get too into the weeds, but I feel the thing to know about the recast, it's a way to refinance without the expense and risk of whether you can actually refi at that moment in time when you want to. And I think the example we see most often is when clients can basically only kind of cobble together 5% down for their new home, even though they have all this equity, but then when they, you know, cash out and sell their prior home, maybe they get to 10% down or 20% down and knock off that PMI. Just, it's the best recast all day. And then of course, if you can refi and drop the rate and put the money down all the better, it's just that we're looking at, you know, possibly stubborn inflation this year.
Hoping for a significant rate drop, I just don't think is as realistic. That's where the recast, I think, again, is even more of a prominent option, kind of in the rate climate that we're in. Oh, that's very well said. I totally agree with that. And then the last one would be probably a home equity line of credit. Optimal is client has a home with equity in it, and they already have a home equity line on it and they have available funds.
We can either, you know, you can use those funds to meet the down payment and then recast, you could kind of double up where you're, all right, I have equity in my home. I don't have enough cash to meet the minimum bar down payment. Oh, but I have a home equity line. Okay. We can use the home equity line then to meet the minimum down payment. Now, the thing to keep in mind is as you draw on that home equity line, that's going to produce a payment. You have to qualify with that payment as well. And pay it. Yeah, and then you meet the minimum down payment and then you sell the house, pay off your first mortgage and then your home equity line on that house. And then you recast the new one, pay off the home equity line. And then if there's extra money, you can recast the first mortgage.
I will say, I'm a huge fan of the home equity line strategy. I set one up on my house years ago because I just wanted to have the money there to tap. If for any reason I wanted to make some sort of real estate move and not have to borrow from a traditional bank, especially when you're self-employed and your income fluctuates and whatever goes on, it's nice to have other ways to get things done. Real estate is always out of nowhere. The dream house, it's never on the month you expected to go on the market typically.
I positioned myself to be able to pick up a house if I wanted to flip it or buy it as a rental. And then when we unexpectedly bought our new house, when I was eight months pregnant, I used my home equity line to eventually finance all the renovations because I needed a way to stay in my old house for 18 months, but find a reasonable way to finance all the renovations. My home equity line came through. It's just, it's important to get it early because they don't to give you a home equity line when they already know you're working on selling the house. It's just something that I should have a whole separate episode on this, but they're just great to have.
If you're in a situation where you think you might buy an investment property, vacation property, or new property out of nowhere, and you have a lot of equity and it would open up options for you to tap, I recommend it for those reasons. And you can reach out to me and Danny, you know, after the episode to get information on how to get a HELOC if you're interested. Yeah. I, yeah, I have some great resources for HELOCs, um, the different and how they're structured and I can, I help people.
They call me, I get a lot of HELOC requests throughout the week. Um, the most important thing too is let's say you open a HELOC as long as it's a home equity line of credit. Um, you're only paying interest on what you draw. You're not paying interest. You know, if you open a hundred thousand dollar HELOC and you haven't drawn on it, you're not paying an interest on a hundred thousand dollars. You're not using it. That's the big thing. Um, what you're saying, Tina is it's good just to have open as an option. Um, and there's really not a huge, there's no downside to having it open. And just what you said, real estate moves quick.
It's out of nowhere. And that's how it is for a lot of things in life. Um, having that it's huge. Yeah. And you know, there's this other kind of HELOC where you can open one on the house you're buying and then keep it long-term. I don't know if you want to speak to that, but that's, there's two ways to do the HELOC thing, depending on, you know, your circumstances and the timing of when you're talking to us and when you found the house, is there anything you want to speak to that product? It's called the purchase money HELOC. Yeah. The purchase, that's a great point. The purchase money HELOC is when you're buying a house and let's say we're not going to do the recast. The recast is great option.
Another great option is purchase money HELOC where, um, let's say the house costs $500,000, um, you have $150,000 in equity on, in your house and you want to use that money towards the next house, but you haven't sold your house yet. You can open up a first mortgage for the loan amount that you decide you want long-term and then open a HELOC in second position. They get recorded at the same time. You go to settlement and you're going to have two closing packages. The first one is your first mortgage, which is your long-term 30 year fixed or whenever you choose. And the second package is your home equity line. And that's being drawn on immediately because it's being used to acquire the home.
That you'll start paying interest on right at closing because it's the money's now being drawn. Then when you sell your house, you take that equity and pay off or pay down or whatever you want to do to that home equity line of credit. Now let's say the home equity line of credit was $150,000. Uh, and you put $150,000 on it. That home equity line is now open unless you close it, uh, for future use. And if you paid dollar for dollar, you owe nothing on it. And you've acquired the property with the money. That's why it's called a purchase money HELOC. But you've also sold your house and it would act in a form of, um, a way of taking care of the gap of taking the equity out of the house. It's just an alternative to the recast.
I think both, I present both options to the client when I'm on the phone with them and then see which, which they prefer. Thank you. And I feel we're in danger of people being oh my gosh. I'm going to just give a summary and then say, talk to us five options. I mean, option zero ideal is home sale contingency just in this market. It's often not viable, but we always explore it. If we can, then you can look at number one, qualifying to carry both mortgages at the same time. Number two, renting out your existing home. Number three, getting this third-party offer, which would be a very good risk management move, if that's your biggest concern for the recast. That's our crowd favorite followed by the HELOC, which is also great, whether it's on your old house or your new house, they're very powerful.
They work really well and they're just a great tool for, again, I always tell people say your car dies out of nowhere and you just want to go pay quote cash at the dealer and not get financing through them, use your HELOC. That may not make sense, interest rate wise, but it's just nice to know that you have your own line of credit that you can use in case of an emergency, with that, I'm going to, we're going to put a pin in it and just say, if you're sort of in that slow roll situation where you're, you know what, let me get my ducks in a row. If the unexpected happens, I've done all the groundwork. And then when that unexpected house comes along, you can focus on whether you want to buy that house, whether versus whether you're able to and what it's going to take, because those are two totally different things and they both have their own, you know, mental load and time to figure out.
We just to be, we to be there early. It's not an imposition for us. In the show notes is my contact info and Danny's. Reach out and thank you all much for listening. Danny, do you have a final? Um, Pearl of wisdom you'd to offer? Oh, I don't know. I think you summarized it. Well, I think Pearl wisdom is working with you and your team. Um, you guys are going to think I paid you for all this. Yeah, you guys do a phenomenal job and that's a great summary there. And, anybody can reach out at any point and ask any questions, even if they're far down the line, it's okay. Happy to have any conversations. Thank you.
Thanks everyone for listening, listening and, and listening with us eventually. That was a funny slip of the tongue and keep your ears open for the next all things home episode.
