It’s the ultimate financial juggle: selling and buying a house at the same time. From lining up 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 the next a lot smoother.
It may not be easy, but you’ve got several options to consider.
The most common way to sell your house and buy another is with a contingent offer. This means your offer to buy depends (is contingent) on selling your current place.
Honestly, sellers won’t be thrilled with this contingency. If your home doesn’t sell within the stipulated time, you can walk away from the deal. That’s good for you, but the seller then has to find another buyer.
Or worse, the seller finds another buyer while you’re still trying to sell your home — and you’re back to house hunting again.
Contingent offers also rely on coordinating the closings of your old and new houses, which is not always easy.
Another contingency idea: the sale-leaseback. This will require a willing and patient buyer.
The plan is to close the sale on your current house that includes an agreement with the buyer that you will lease it from them for a set (and short) period of time. That way, you can stay in your home until you buy a new place.
This gives you the cash proceeds from the sale to use as a down payment on your new home. Meanwhile, you’re paying rent to your buyer, but you get to move just once.
Again, this is unlikely to work in a competitive real estate market — and you’ll need a buyer with a lot of flexibility.
Bridge loans were designed for this use case. It’s a short-term loan that helps you finance the purchase of your next home while you sell your current house.
If you can’t afford a down payment until you sell your existing home, a bridge loan can be a good solution. It also allows you to move just once.
Here’s 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 buy your next house.
You make the usual payments on your existing mortgage, plus interest-only payments on the bridge loan.
When your existing home sells, the bridge loan is converted to a regular mortgage on your new home.
Not all mortgage lenders offer bridge loans, and they can be structured in various ways.
“It’s not a consistent program lender to lender,” Bill Banfield, chief business 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 we’ll do loan amounts up to $500,000 in a first or second lien position. It’s a six-month loan that is interest-only during that time period,” Banfield added.
Loan terms can vary, so allow time to shop for bridge loan options from various lenders.
A second mortgage, such as a home equity loan, can work like a bridge loan. If you have enough equity in your home, you might be able to use the lump-sum home equity loan for the down payment on your next house.
Of course, you’ll need the cash flow and appropriate debt-to-income ratio that allows you to afford the additional payments you’ll take on until you sell your existing home. Remember, you’ll be paying your primary mortgage and the second mortgage at the same time.
One caution: A lender may not allow a second mortgage on a house that is already on the market. In that case, you’ll want to get a home equity loan before listing your house.
Read more: Best home equity loan lenders today
A guaranteed buyout lets you sell your home first and then buy your new house. For example, the buyer may be an employer offering to take your existing home off your hands in order to help you relocate. The employer then sells the home through a real estate marketing company.
Other guaranteed buyouts can be offered by:
“We buy ugly houses for cash” firms, often seen promoting through small corner-of-the-street signs.
iBuyers. These are “instant” cash buyers such as Opendoor, HomeLight, and Offerpad. Though the sales can be quick transactions, the fees charged may mean you get a below-market net price for your home.
New home builders. A new wrinkle in the guaranteed buyout space: Some builders offer the service to buyers who want to purchase newly constructed homes.
There are varying risks among the listed options. Some of the pitfalls can include:
Holding two mortgages and the additional interest involved and also being credit-worthy enough to qualify
Negative impacts on any plan if your current home takes too long to sell (one example: an expiring bridge loan)
Accepting a lower price on your home as the pressure of making a move to your new place looms
Now we’re getting into the fringes. A ‘subject-to’ mortgage agreement is not considered illegal, but likely violates a mortgage agreement.
Here’s how a subject-to transaction works:
A buyer pays the mortgage, but the seller keeps the loan with their lender.
The deed is transferred to the buyer, but the seller remains responsible for the loan because the lender has not been notified.
If the buyer defaults on the payment, 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’s similar to an assumable loan. However, the lender is out of the loop. Caution: If the lender discovers the deed transfer, the due-on-sale clause in the mortgage can trigger immediate payment in full on demand.
There are many risks embedded in subject-to agreements, and state laws regarding them vary. As the North Carolina Real Estate Commission states: “Transferring a property subject to the seller’s existing mortgage without disclosure to the lender is generally a form of LOAN FRAUD.” (All caps by the commission.)
finance.yahoo.com
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