On this page 9 sections
In short
- Allowed: borrowed money secured by an asset, like a HELOC, can be an acceptable down payment source on many loans.
- Counted: the purchase lender includes the HELOC payment in your debt-to-income ratio.
- The real hurdle: qualifying with your current mortgage, the HELOC and the new mortgage at once.
- Be upfront: knowingly making a false statement on a loan application is a federal crime.
Check the purchase first
Before you draw a dollar, find out whether you'll qualify for the new mortgage while carrying both homes. That's the step that most often derails the plan, and it's easier to fix before the money is borrowed.
How it works
- Tell the HELOC lender you plan to buy before you sell. Some programs allow it, many don't, and it's easier to arrange before the home is listed.
- Draw the down payment and closing costs for the new home.
- Close on the new home, then move and sell the old one.
- At the sale, the HELOC is paid off from the proceeds, along with your mortgage, and the line closes.
What the purchase lender will check
Lenders following Fannie Mae's guidelines accept borrowed money secured by an asset as a source for the down payment, closing costs and reserves. They count the payment on that loan as a debt when they qualify you. If the loan doesn't require a monthly payment, the lender must calculate an equivalent payment and count it.
Expect them to document:
- The terms of the HELOC.
- That the HELOC lender isn't a party to the purchase.
- That the money actually moved from the HELOC to you.
You can't hide the HELOC, and you don't need to: the lender traces the deposit, and the line will show on your credit report.
Enough equity, but can't qualify carrying both?
This is the trap that surprises people. Your current mortgage payment usually counts against you until the old home is truly gone. Under Fannie Mae's rules, a lender can leave it out only once the sale has closed, or with a signed sales contract and confirmation that the buyer's financing contingencies have cleared. Other loan types have their own rules. If the numbers don't work with both homes, the options include:
- Selling first, or getting the sale far enough along to meet the program's rules.
- Keeping the old home as a rental. Some programs can count expected rental income under their own rules, with documentation.
- Showing more reserves, if the program allows it to offset the risk.
- A smaller purchase, or one of the alternatives below.
See HELOC with high debt-to-income and HELOC requirements.
Be upfront with both lenders
Some HELOC lenders won't open a line on a home that's listed for sale or about to be, and some ask how you'll use the money. Answer truthfully. Knowingly making a false statement on a loan application to influence the lender is a federal crime under 18 U.S.C. § 1014, which covers banks and mortgage lenders. "Just say it's for home improvements" is advice you'd be signing your name to.
Some HELOCs charge a fee if you close the line within the first few years. Ask about it, and check the agreement.
Other ways to buy before you sell
| Option | How it works | Watch for |
|---|---|---|
| HELOC on current home | Draw the down payment; repay from the sale | Early-closure fee; you qualify with all three payments |
| Bridge loan | Short-term loan against your current home, built for this | Often higher cost; fewer lenders offer it |
| Buy with less down, recast later | Buy with a smaller down payment, then pay a lump sum from the sale | Not every loan allows a recast; mortgage insurance until you request removal, if your loan type allows it |
| Sale contingency | Make the offer contingent on selling | Weaker offer in a competitive market |
Taxes
HELOC interest is deductible as home mortgage interest only if the money buys, builds or substantially improves the home that secures the HELOC. Money used to buy a different home generally doesn't meet that test. Money used for business or investment can fall under other rules. Ask a tax professional.
Frequently asked questions
Can I get a HELOC if my house is listed for sale?
Often not. Many lenders won't open a line on a home that's listed or about to be. Tell the lender your plan up front.
Will the new lender count the HELOC payment?
Yes. Lenders following Fannie Mae's guidelines count the payment on a secured loan as a debt when they qualify you.
Does my current mortgage still count if my home is under contract?
Usually, until the sale is far enough along. Under Fannie Mae's rules, the lender needs a signed contract and confirmation that the buyer's financing contingencies have cleared.
What happens to the HELOC when I sell?
It's paid off from the sale proceeds at closing, along with the mortgage, and the line closes.
Is a bridge loan better than a HELOC?
A bridge loan is built for buying before you sell, but it often costs more and is harder to find. Compare both.
Questions about your own situation? Contact a licensed loan officer. It's optional, and your information is not sold to lead marketplaces.