We often get calls from potential Buyers (hereinafter “Buyers”) advising us that they are purchasing a new Property. As a result, one of the first things we ask is are you getting a loan, and if so, do you already own another property? If the answer is “yes” to both, we ask a follow-up question, “What do you plan on doing with the property that you own?”. Meaning are Buyers planning on selling the home before or after closing on the new Property, or are they planning on keeping it as an investment? Either way is common, but there are pitfalls to both alternatives that Buyers need to be aware of before making a decision. For purposes of this blog post, we will focus on the issues that can transpire if Buyers planning on purchasing the new property for their primary residence and on holding onto their current property – at least until after closing.
The first thing Buyers need to be aware of is even though they may think they can afford to own both properties at the same time, unfortunately what they think doesn’t matter. It’s up to the lender to decide. This may entail reviewing all the Buyers’ income and financial statements, and plugging the same into a formula to assess Buyers’ debt to income ratio. If Buyers’ income and finances do not meet the lender’s threshold criteria, Buyers will not be able to get the mortgage loan for the new property unless they sell their current property. This is problematic as many sellers will want to know in advance if you have to sell a current property in order to purchase their property; as selling a property takes time with no certainty that it will sell anytime soon. As a result, many sellers will have it specifically incorporated into the rider to the contract that if Buyers are denied a mortgage loan unless they sell their current property, Buyers will still have to move forward with the deal. Obviously, this is problematic, as without a mortgage/loan many Buyers will not have the money to close on the new property in cash; thus resulting them to be in breach of contract.
In order to mitigate against such a scenario, we always recommend that as soon as Buyers engage our firm, they speak to their lender specifically about this issue. If their lender says it shouldn’t be an issue, we strongly recommend that the Buyers get it in writing via a letter or an email. If owning Buyers’ current property will impede Buyers ability to obtain the new property, see if certain things can change that position (e.g., getting another co-borrower or renting Buyers’ current property out). If so, then Buyers need to look to see who could be added as a co-borrower, or try renting their current property out as soon as possible. If neither option works then at least Buyers know ahead of time, before spending money on due diligence (e.g., application fees, appraisal fees, attorney’s fees, etc) and risk being in breach of contract, that they cannot move forward with this particular property.
In our next post, we will address what happens if Buyers are aware that they have to sell their current property in order to purchase the new property, and how to help mitigate their risks.
The information in this blog posting is for general information purposes only. Nothing in this blog or associated pages, documents, comments, answers, emails, or other communications should be taken as legal advice for any individual case or situation. The information in this blog is not intended to create, and receipt or viewing of this information does not constitute, an attorney-client relationship.