Help us figure out how to buy a house

In My Humble Opinion
1

My wife and I recently moved to Las Vegas from Baltimore so she could take a new job. We are renting a house in Vegas and still own a house in Baltimore that we are renting out to friends of the family.

The lease on our Vegas house runs through June 2014, but we expect that prices on houses that we’d want to buy here will be lower over the next six months than they will be next spring. Also, we won’t be able to put the Baltimore house on the market before next summer, if then. (We may do some major renovations before selling.)

So we’re in the position of possibly wanting to buy a place here before selling the other house, and while still renting the house we’re living in now. (We’ll leave aside the question of subletting or getting out of the lease for now.) Although our credit is great, I doubt that we would qualify on our income for a second mortgage that would probably be about 50% greater than the one on the Baltimore house. And we would have a hard time paying an extra mortgage payment, as well.

We have cash equal to about 10% of the expected purchase price that we can put down.

So we’re looking at how we can manage all this. We probably couldn’t borrow enough from the family to pay cash for the new house, but I was wondering if one of our parents could co-sign, or if we could use their cash (they have about as much as we expect to pay for a house) as collateral for our mortgage, and then borrow from them enough to make the mortgage payments from the time we buy until we get out of the lease and sell the Baltimore house. We would then refinance or otherwise relieve them of any encumbrances, and pay back what we had borrowed.

Alternately, could we use our retirement funds as collateral? We have about 2/3 of the purchase price in IRAs.

Any other suggestions?

2

Always double down on eleven.

3

I can’t answer your questions with a firm answer, so here are just some thoughts.

First, 10% down is minimal and marginal. If there’s any way you can save more, do it.

You can always make an offer on a property with a contingency of a prior sale. This makes the offer less attractive, and there is usually a bump clause (ask if you don’t know what that means).

What funds you can use for purchase and loan collateral are up to the lending institution. I advise not to hide anything from them, as some things are illegal and even the legal ones can backfire if you aren’t up front.

I also advise approaching a lending institution right away to see your options. One you might consider is a bridge loan, which means you will be prepared to pay on two mortgages at once, but only for a limited time. These are typically for 6 months, renewable for another 6. Expensive, but it can be the solution to a tricky financial bind.

Don’t make an offer on a property until you have investigated this, and be prepared to include a pre-approval letter with your offer. It can make all the difference.

I know nothing about retirement funds and advise you consult an expert. Your lending institution might be a good resource.

Consider putting your Baltimore house on the market sooner, and perhaps without remodeling. I can pretty much guarantee that for every dollar you spend on remodeling, you will get only 50-80% back. OTOH, if remodeling is what is needed to sell it, you may have no choice. It depends.

You can put a property on the market even though you have a renter with a lease. The lease runs with the property, but that might not be a problem – there are many solutions. If you feel that having the property on the market (showings, uncertainty, etc.) is detrimental to the renter, offer him a discount on the rent to compensate.

I say this from the viewpoint of an experienced Realtor[sup]TM[/sup].

Good luck.

4

Thanks.

Not an option since, even under the best circumstances, we won’t be able to sell the house for many months after we’d like to buy the new one. And most houses here are being bought with cash by investors, so you have to have a very solid offer to beat out the cash buyers.

Yes, we’re aware of this.

5

A prior sale contingency is not great, but it can be used regardless of the time frame. You seem to be aware of the pitfalls, but don’t discard this idea totally. An offer for a higher price might mitigate such a contingency, for example.

I have an offer in the works with a prior sale contingency right now. It was made 5 months ago, and we just extended it to close next March at the latest. From the seller’s perspective, it’s a good enough offer that they don’t want to pass it up, and they aren’t in a great hurry to sell. The listing agent will continue to market it meanwhile, and if they get a better offer, they can take it (that’s what the bump clause allows).

6

I think some financial facts might help with answers to your financial question. Things like PITI of the home in MD, rent you are getting for home in MD, current income, expected price of LV home, etc. GL

7

Sorry, I don’t see how that would help, and I’m not comfortable revealing those details.

The mortgage for the Baltimore house is about 2/3 of what we expect to pay for a new house in Vegas, and if we’re lucky we may be able to sell it for about 1/3 more than that mortgage.

The rent we are paying in Vegas is roughly equal to our mortgage in Baltimore, and we are getting about 20% less than that from our renters. (For various reasons that aren’t relevant to this discussion, they aren’t paying full market price.)

Our combined annual income is about half the purchase price of the new house. Once we are clear of the Baltimore mortgage and the Vegas rent, the mortgage payment on the new house should be quite affordable, and we can use the “profit” from the sale to pay back monies borrowed from family.

What I hope to learn from my fellow Dopers is how we could best use family resources to buy a house here: as I asked in the OP, do mortgage lenders accept co-signers the way banks do for car loans? Or would they accept cash in a bank or retirement account as collateral for a mortgage?

8

So, you aren’t interested in hearing that I think buying a house in Vegas before you sell the one in Baltimore is a terrible idea? Because I do. Sell the Baltimore house first, then buy in Vegas - don’t put your financial feet in two boats at the same time. I wouldn’t do major renovations on the house in Baltimore, either - I’d do a lipstick-and-rouge reno on it that you could complete in about a week at the most, and then sell it.

9

Really, you don’t see how financial specifics would be helpful in giving you financial advice?

Co-signing can be done, yes, but usually not in lieu of a down payment. These days and especially in Vegas, you’re probably going to need to put 20% down. The bank is going to want to be sure that you are not borrowing the funds for the down payment, so they’re going to be looking at your assets and any major deposits in the days leading up to your closing.

10

Mortgage lenders will accept co-signers, but the co-signers may end up mortgaging or pledging their property, too. Cash in bank can be used as collateral or down payment, but it may freeze the funds. Retirement accounts, I don’t know.

Ask your lender what your options are.

11

Understand your position, CommaS. Personally, I would rent rather than handing my family the financial risk of co-signing or loaning. This type of thing can really mess up a relationship despite best intentions.

Consider a scenario where rates move up 1.5% over the next six months (33%) and home prices drop 10-20%… you may not be able to sell your MD home and refinance the LV home to pay off your relatives. Of course, the opposite could also happen and this could all work out great.

With the info I have I can only throw out hard-money lenders (usually high rates and points) or seller financing (contract for deed, lease-option, etc) as possibilities. Both are scenarios where it is common for the buyer to be taken advantage of so be careful.

Last thing, I believe that traditional lenders will grant 75% of a lease payment towards your income providing there is a 12-month lease. Therefore, I would suggest that you get the rent up to market-level on your MD home to make you more appealing to lenders. GL however, you choose to proceed.

12

Your parents could buy a house and you could rent it from them. You could buy it from them later.

13

Perhaps I should have pointed out that the reason we are in a hurry to buy is that Las Vegas is poised to begin another bubble. After falling precipitously in the financial meltdown, home prices here are beginning to climb again, and most people expect them to rise faster than in the rest of the country. The market is being driven by investors who are paying cash to turn them into rental properties or to just flip them. (Possibly moderating that somewhat is about 70,000 bank-owned properties that are being kept off the market for now, but which will be released slowly over time.)

Assuming that the shenanigans of a certain political party don’t throw the whole world’s economy into a tailspin, the prospect of home prices here going down is virtually nil.

So if we wait to sell the Baltimore house before buying here, we will be paying substantially more, and increasing the chance that we could end up underwater if there is another bubble and bust.

14

Explain what difference it would make to your advice if the house we’re looking to buy is $200K, $400K, or $800K.

15

Another point I should make is that I believe we could probably afford to pay two mortgages without much difficulty, assuming that we had some rental income from the Baltimore house, and were no longer paying rent here. It might be a little tight, but not unbearably so.

16

Sure.

  1. It changes your rate & loan availability. Anything over $417 is a jumbo, which requires better credit and more hoops to jump through. It will be significantly harder for you to get a co-signer in that case.

  2. It changes how much money you’re talking about borrowing from family. Coming up with $10k is a lot easier than coming up with $60k. The bank is going to be a lot less touchy about a smaller amount coming from somewhere else.

  3. It changes the amount of money that you would need for a down payment, and how quickly you’d be able to come up with it. People who make $400k a year often have a lot more disposable income and can save a larger % of what they make, enabling them to save up for a down payment in less time. If that were the easier option, my advice to you would change.
    In general, when you’re looking for information from people who know more that you on the subject, it’s rather abrasive for you to claim that they’re asking questions for no reason.

17

Please disregard this idea, as it is a really bad one. You should never view your retirement funds as being available to use. It seems like you have money in an account that could be used but it is better to think of your retirement money as being a fiction that is not available, until that someday that you retire.

You are probably young-ish and think that there is plenty of time to recover from putting these funds at risk, but no, the future is here sooner than you think.

Use that old Jedi mind trick on yourself: “These aren’t the funds you are looking for. Move along” Obi Wan.

Retirement funds are like a small snowball slowly rolling down a hill. If you leave it alone and let it run it’s course it will get bigger, and bigger, and someday you could discover a big pile of money at the bottom of the hill.

If you stop it to build a snowman it will melt away on you and all you get is a carrot and a couple pieces of coal. :wink:

18

Thanks for this response.

Well, I didn’t mean to be insulting or to imply that they had no reason for asking, and I apologize to anyone who took offense.

But come on, are you willing to post your income here, and how much your mortgage payment is? It’s hardly unusual to want to keep such details private, even on a presumably anonymous message board. (I’m sure that anyone who wanted to spend some time looking through my posts could discover my real identity, and that’s probably true of a lot of us.)

I will say that we are well below the jumbo level.

19

I’m not youngish, I’m 58, and I’m not talking about using the funds to buy the house, but as collateral for the loan while we are holding two mortgages. After selling the Baltimore house, we would refinance and release the encumbrance on the IRAs.

20

It’s cool. A lot of folks on here post financial specifics, but some are understandably more private about it.

They will take your IRA & 401(k) and any other assets into consideration when evaluating the loan. There is no big account specifically called “collateral”. They just take everything into consideration.

I think your biggest issue is the extra 10% for the down payment, unless your potential house appraises for way higher than the loan.