3 Ways to purchase your next home prior to first selling your current home

3 Ways to purchase your next home prior to first selling your current home

Dear Friends,

There are reasons why some homeowners would like to “move up,” and purchase their next home prior to first selling their current home. Here are 3 common ways people are doing this in today’s market:

  1. Accessing Funds from a HELOC for Down Payment:  A HELOC is an acronym for “Home Equity Line of Credit.”  It is a 2nd lien that would be placed on one’s home and it is subordinate to the first mortgage.  A HELOC is a flexible loan that will allow you to borrow up to your credit limit and then pay it down as you are able so long as you make the minimum monthly payment.  Minimum payment requirements are usually very manageable, often requiring interest only.  Another nice feature with the HELOC is that there is usually little to no fees for application and closing. It is important to note that one should not apply for a HELOC with the intent to immediately use it for the down payment on a new home, as a traditional “bridge loan” would be used.  Almost all banks and credit unions frown on this type of immediate use for a newly opened HELOC.  Like any loan that involves a lien on real estate, there can be a fair amount of paperwork involved for the lender.  If a HELOC were to pay off early (as within a month or two of being approved for it), the bank or credit union will have invested time and effort into processing a loan that had no upfront fees, and possibly little to no interest paid on it.  If one is to use funds from a HELOC for down payment on a new home, the HELOC should have been in place for a period of time.
  2. Bridge Loan:  This is a loan against one’s current home with the express purpose of using the loan proceeds to be used for the down payment on a new home.  Because the bank or credit union is aware that this loan is intended to be used for a very short term time, they can quote and collect the fees as they deem necessary.  The bank or credit union who is lending the money for the bridge loan would require that they also do the end loan financing, which is only fair.
  3. Down payment from savings and/or Gift funds, combined with a one time principal payment re-cast to 78% LTV:  This method has gained a lot of popularity over the past few years.  The advantage is that it is a quick and efficient way to close on a new home, and it is more cost effective then other methods.  If a conventional buyer is able to put 5% down on a new home from their savings and/or gift funds on the initial purchase, they can then put additional funds down later using the proceeds from the sale of their current home.  This large, subsequent additional principal payment will put the homeowner in position to adjust their payment much lower with a “1 Time payment Recast.”  Thus, their payment will be recalculated to amortize based on the new lower loan amount.  Furthermore, if the homeowner puts enough down to obtain a 78% Loan-to-Value from their original purchase price, their PMI will be eliminated as well!!  The benefits of this method is that there are no fees or interest to pay as with the temporary financing associated with HELOC or bridge loan financing.  This method should also be easier to qualify for as there would only be the new house payment and current house payment included in the borrower’s debt ratio, opposed both house payments, plus the HELOC or Bridge Loan payment to be included in the borrower’s debt ratio.
For others, the preferred or ideal way to purchase their next home is the stayed true method of selling their current home first.  And for many, it is really their only option.  However, there are some ways that can make working through the logistics of this process more manageable.  Ask your Realtor whether an extended closing date and an extended possession date would work for your home sale.  It is possible that a seller can get up to 60 days on both, making a 120 cushion to find and close on a new home.  With the low inventory, red hot seller’s market that we have experienced in the past 5-6 years, this option might be a negotiable term for some.
In monitoring the market, we continue to find that our rates are at least matching the credit unions, but often beating their rates.  But going further, my team and I take pride in the responsiveness, speed and efficiency that we provide, which cannot be matched by the banks or credit unions.  For pre-qualifying, pre-approval, or getting a Loan Estimate, please reach out to me.  I love hearing from my past customers and those professionals in the Real Estate community.
Thank you for your referrals!