Homeowner is moving for a new job but lacks the cash to purchase next house; what to do?

Q: I will be moving to a new community to take a job. Home prices have increased substantially during the past few years, and I have enough equity in my current home to buy with 20 percent down. The problem is that until I sell, I will not have sufficient cash to buy a new home with a big down payment. What can I do?

A: The major value of mortgage insurance through the FHA, USDA or private mortgage insurance (PMI) is that it allows you to buy with less than 20 percent down.

Buying with little down today allows buyers to acquire real estate without waiting years to build up savings or face higher future prices. However, there is a cost for mortgage guarantee and insurance programs, so being able to finance with 20 percent is an option to consider.

In this situation, we have an equity-rich buyer but also a buyer without sufficient cash to write a check for a big down payment. Here are several options:

• First, you can obtain a home equity line of credit (HELOC). You can withdraw funds up to your credit limit and then pay off the debt when you sell. HELOCs are generally cheap to originate but raise two concerns: If the house sells for less than expected, then how do you pay off the HELOC debt? Also, some HELOCs have “early closure” or “closing cost recapture” fees. This means if you open a HELOC and quickly sell the property, you may be subject to a prepayment penalty by another name. Lastly, some HELOC applications ask if you intend to stay in the home at least a year. If you say “yes” that is what the lender generally expects.

• Second, you can get a second mortgage on your current property. Second mortgages are commonly available with fixed rates, while HELOCs generally have adjustable rates.

Also, second mortgages generally do not have prepayment penalties.

• Third, you can get 80/15/5 financing with the new home. In this case, you finance with a first mortgage equal to 80 percent of the purchase price and a second mortgage equal to 15 percent. The 5 percent balance comes from you in the form of cash at closing. Purchases with 80/20 percent financing are also available, meaning there is an 80 percent first mortgage and a 20 percent second mortgage. The advantage of 80/20 financing is that it requires nothing down. Because this approach requires the buyer to borrow more money, it may be more challenging to qualify for financing. When the first home is sold, equity from the sale can be used to pay off the second loan on the new house.

What if the first home takes a long time to sell? With several loans outstanding, a borrower can face big monthly payments until the current home is sold. Worse, what happens if the first property simply doesn’t sell?