Yes, you can get a mortgage in one state to buy a property in another state.
Due to the extended lockdowns, I’m more motivated than ever to relocate from San Francisco to Honolulu. I have been looking seriously at Honolulu property since 2015 and I’m finally seeing some great deals in the area.
My logic for moving is this: If I’m going to shelter-in-place for months on end in the future, why not shelter-in-place in a nice property that has plenty of land, lots of indoor space, a pool, a hot tub, a garden, good weather, and is close to the beach?
When you have kids, you crave for as much space as possible to enable them to run around and have fun. Hearing their screams of delight is so wonderful.
Given we have enough passive retirement income to sustain our lifestyle, there’s really no need to remain in expensive San Francisco.
Getting A Mortgage In One State To Buy In Another State
After getting my preapproval letter of credit, I asked my lender the following question:
Question: Can one get preapproved for a mortgage in California to buy property in Hawaii?
Answer: Currently your preapproval is for a primary home in California, but it can be used to purchase a 2nd home in Hawaii if that is your desire. I would need to send your application back into underwriting.
But I don’t see an issue with this. You would need to explain why you had changed our minds about a primary home versus a vacation home.
As my lender had incorrectly assumed that I would be buying a vacation home in Hawaii instead of a primary home, I went on to explain to him that we would be buying a primary home in Hawaii instead and why.
In general, buying a vacation property requires a higher down payment and you will be charged a higher mortgage interest rate. I normally see vacation property loan-to-value ratios of 30% and up in order to get a mortgage. Vacation property mortgage interest rates are generally 0.5% higher as well.
Therefore, if you can somehow find a way to get a primary residence mortgage versus a rental property or vacation property mortgage, your terms will be more favorable.
Can You Buy A More Expensive Home In Another State With The Preapproved Amount?
Given you can get a mortgage in one state to buy a property in another state, the next logical question is whether you can use your preapproved mortgage amount to buy an even more expensive property than the initial estimated purchase price in another estate.
For example, I was preapproved for $1,700,000 with an estimated purchase price of $2,800,000. I erroneously focused on a specific property to buy. Instead, I should of tried to get preapproved for the maximum mortgage possible to give me more options.
Now that I’m looking at more expensive property in Honolulu with lots of land near the beach, I’ve somewhat limited myself based on the size of my down payment.
Here is my question to my mortgage officer on whether I can use my existing preapproved mortgage amount to buy a more expensive property and his answer.
Question: What if I decide to buy a $3.7 million property in Honolulu instead of a $2.8 million property in San Francisco? Is that OK if I put down $2 million to keep the borrowing amount unchanged at $1.7 million?
Answer: I would need to run the numbers again for a higher purchase price. But the only real figures that might change are the property taxes and HOA, if applicable.
If you wanted to move down this path, we would need to send your file back in for loan approval. I would need to check that we meet the reserve requirements and debt to income ratios.
Your income is location-independent. Therefore, I don’t see this as an issue. We would, however, need to explain the switch in your thoughts which is okay. We just need to explain your logic. Let me know if this is something you are thinking about
Despite borrowing the same amount of money, your loan amount will need to get reevaluated mainly because it costs more to maintain a more expensive property due to property taxes, HOA expenses, maintenance expenses and insurance expenses.
Contain Your Housing Costs
We discussed in the past how an expensive home can ruin your path to financial independence. The carrying cost for a luxury property really gets to be painful after a certain point.
Below is an example of the cost to own a $4.5 million house. Its property taxes alone are $55,000 a year!
Thankfully, everyone today can get a much lower interest rate than 4.5%. But if you want to depend only on your investments to pay for the house in retirement, look at how much you would need!
The Ease Of Money Flow
Most people are tied to their jobs. They cannot just get up and relocate to another city and state. However, as the work from home trend increases, it is logical for more people to consider relocating to a lower-cost area of the country. Or to an area that provides for a higher quality of life.
I’ve discussed this multi-decade migration trend in my post, Why I’m Investing In The Heartland Of America. The nationwide lockdowns are only going to accelerate this trend. Real estate is the obvious beneficiary. The difficulty is figuring out the right real estate investment and the best way to invest in real estate.
If you have a family and earn $300,000+ in most big cities, the quality of life is fairly good. You can own a modest home, afford to raise a couple kids, and max out your 401(k) every year. Heck, you can even take some nice family vacations once in a while.
However, even if you earn multiple six figures in the SF Bay Area, it doesn’t mean much when the cost of living is so high here. You’re squarely in the middle class. In order for us to boost our standard of living, we should move.
Relocating to Honolulu will stretch our dollars by ~30%. Therefore, our $250,000 in estimated passive retirement income would grow to roughly $325,000 in buying power.
I wouldn’t have to go back to work for several more years to accumulate more capital. I could also just focus on writing on Financial Samurai instead of spending any time on business development.
Living in a nicer environment with increased buying power is an enticing proposition. Further, my parents would have extra support just in case they need help.
The Ability To Buy Out Of State Will Affect Prices
My original thought process was to try and buy another San Francisco property at a discount. Because the labor market is generally very strong in San Francisco, property prices should continue to do well. However, once I started seeing some big discounts in the Honolulu luxury market, I’m having second thoughts.
Thanks to being able to get a mortgage in one state to buy a property in another state, my down payment and preapproved capital is at high risk of being used to purchase a home in Honolulu instead of in San Francisco.
Pay attention to the migration trends of your city. If enough people decide to leave, your city’s real estate prices may be negatively affected. Although, San Francisco bargain hunters will likely be disappointed. I fear that for every one person who leaves, 1.2 people will take that person’s place.
If you are an investor, it is up to you to identify which are the best states and the best cities to buy property for capital appreciation and rental income appreciation. Luckily for you, I’ve done the work and will continue to report as conditions change.
Real Estate suggestions
If you’re looking to refinance a mortgage or buy a new property with a mortgage, check out Credible. Credible is a leading lending marketplace where lenders compete for your business. You can get free real quotes in minutes. Take advantage of record-low mortgage rates.
If you’re looking to invest in real estate given record-low mortgage rates and the desire for more stable assets, check out Fundrise and CrowdStreet. Both are my favorite real estate marketplaces. They allow you to invest in real estate across the country where valuations are lower and cap rates are higher. The work from home trend is here to stay.
Readers, anybody successfully get a mortgage in one state to buy property in another state? If so, were there any hassles or hiccups along the way?