It’s the ultimate financial juggle: selling and buying a house at the same time. From preparing financing to negotiating closing dates and planning where you’ll live in between, there are several moving parts to consider. However, the right strategy can make the transition from one home to another much easier.
It may not be easy, but you have several options to consider.
The most common way to sell your home and buy another one is with a contingent offer. This means that your purchase offer is dependent (contingent) on the sale of your current place.
Honestly, sellers won’t be thrilled with this contingency. If your home doesn’t sell within the stipulated time, you can cancel the deal. That’s good for you, but the seller will have to find another buyer.
Or worse yet, the seller finds another buyer while you are still trying to sell your house and you go back to house hunting again.
Contingent offers also depend on coordinating the closing of your old and new homes, which isn’t always easy.
Another contingency idea: the sale-leaseback. This will require a willing and patient buyer.
The plan is to close on the sale of your current home that includes an agreement with the buyer that you will rent it to them for a set (and short) period of time. That way, you can stay in your house until you buy a new one.
This gives you the cash proceeds from the sale to use as a down payment on your new home. In the meantime, you pay rent to your buyer, but you can move in only once.
Again, this is unlikely to work in a competitive real estate market and you will need a buyer with a lot of flexibility.
Bridging loans were designed for this use case. It is a short-term loan that helps you finance the purchase of your next home while you sell your current home.
If you can’t afford the down payment until you sell your current home, a bridge loan may be a good solution. It also allows you to move only once.
Here is an example from Union Bank and Trust:
-
Your current home is worth $300,000 and you have a mortgage balance of $190,000.
-
With the $110,000 in equity, you get a bridge loan worth $400,000 to purchase your next home.
-
You make the usual payments on your existing mortgage, plus interest-only payments on the bridging loan.
-
When your current home is sold, the bridge loan becomes a regular mortgage on your new home.
Not all mortgage lenders offer bridging loans and they can be structured in a variety of ways.
“It’s not a consistent program across lenders,” Bill Banfield, chief commercial officer at Rocket Companies, told Yahoo Finance last year when Rocket Mortgage announced a bridge loan offering.
“We (at Rocket Mortgage) will lend up to 80% of the value of the existing property, and will make loans in amounts up to $500,000 in a first or second lien position. It is a six-month loan that only accrues interest during that period,” Banfield added.
Loan terms can vary, so take time to research bridge loan options from several lenders.
A second mortgage, such as a home equity loan, can function as a bridge loan. If you have enough equity in your home, you may be able to use the lump sum home equity loan for a down payment on your next home.
Of course, you’ll need the right cash flow and debt-to-income ratio to afford the additional payments you’ll make until you sell your current home. Remember, you will pay your primary mortgage and your second mortgage at the same time.
One caveat: A lender may not allow a second mortgage on a home that’s already on the market. In that case, you’ll want to get a home equity loan before you put your home on the market.
Read more: Today’s Best Home Equity Loan Lenders
A guaranteed purchase allows you to sell your home first and then purchase your new home. For example, the buyer may be an employer who offers to take away your current home to help you move. The employer then sells the home through a real estate marketing company.
Other guaranteed purchases may be offered by:
-
Companies “We buy ugly houses for cash”often seen promoting through small billboards on street corners.
-
iBuyers. These are “instant” cash buyers, like Opendoor, HomeLight, and Offerpad. Although sales can be quick transactions, the fees charged can mean you get a below-market net price for your home.
-
new home builders. A new development in the guaranteed purchase space: Some builders are offering the service to buyers looking to purchase newly built homes.
There are different risks among the options listed. Some of the pitfalls may include:
-
Have two mortgages and the additional interest involved and also be creditworthy enough to qualify
-
Negative impacts on any plans if your current home takes too long to sell (example: a bridging loan that comes due)
-
Accept a lower price for your home as the pressure of moving to your new place looms
Now we are entering the margins. A “subject to” mortgage agreement is not considered illegal, but it probably violates a mortgage agreement.
This is how a transaction works subject to:
-
A buyer pays the mortgage, but the seller retains the loan with his lender.
-
The deed is transferred to the buyer, but the seller is still responsible for the loan because the lender has not been notified.
-
If the buyer defaults, the seller remains legally obligated to pay the mortgage.
-
If the mortgage balance does not equal the purchase price, the buyer pays the additional amount to the seller, either in cash or through a second loan.
It is similar to an assumable loan. However, the lender is out of the loop. Caution: If the lender discovers the transfer of the deed, the mortgage’s due-on-sale clause may trigger immediate full payment on demand.
There are many risks inherent in subject agreements and state laws vary. As the North Carolina Real Estate Commission states: “Transferring property subject to the seller’s existing mortgage without disclosing it to the lender is generally a form of LOAN FRAUD.” (All caps by the commission).