Move-up home buyers are in a commanding situation. Tight inventory has left them in a great position to sell their current home. Despite concerns that home values could drop, they have actually increased and are on track for gains of around 5-10% this year. Of course, low inventory is a double-edged sword. As soon as they sell, they become buyers – possibly even desperate buyers living at the in-laws while waiting for the perfect property to come on the market!
We get a lot of calls from clients looking for ways to buy a new home first, then sell their existing home. It’s a great option if we can pull it off. The two biggest “ifs” are:
How do you access the equity for a down payment?
How do we qualify for two houses at once?
Sometimes, it takes a good strategy to find ways to make it work. Other times, access to a good program, like a bridge loan, can simultaneously solve many of these concerns.
Getting money out
Some of our preferred ways to get money from an existing home would be to obtain either an equity line of credit or a cash-out refinance. An equity line is helpful because they have little to no cost to obtain, and you only pay interest when you draw on it. A full refi to take cash out also makes sense, depending on the situation (like when qualifying for a HELOC is more complex). The downside of obtaining loans with repayment provisions is that you would need enough income to qualify for your loan(s) on your current home and the new loan on the purchase.
Qualifying with additional obligations
Solutions to this problem are very situational. It could be possible that the income supports the obligations; sometimes, rent can be used on the departing home, and other times there are unique programs that allow for expanded tolerances for that situation. Having an experienced loan officer makes a tremendous difference. Since the circumstances become more fluid, it becomes easier for loan officers and lenders to miss important details – like accounting for the new payment on the HELOC when there is none. Many newer LO’s don’t have that forward-looking experience.
How a bridge loan helps
A bridge loan is a unique loan program. It is a program designed to solve the two critical issues for clients who want to buy first, then sell. A new loan is made in place of the existing loans on the existing home. This new loan is made up to 75% of the property’s value. For example, if the property is worth $1.0M and the combined loans are for $450K, one larger loan at $750,000 is made, freeing up the $300K the buyer needs for a down payment.
What makes them truly unique is the repayment terms. A bridge loan will have a 12-month balloon payment provision, with no payments in that 12-month window. Interest still accrues, and the loan is due in full at the end of the year. Because the loan has no payments due, it can be ignored from qualifying. Getting money out and eliminating the payments is precisely what selling the home would do.
These loans can be more costly than the alternatives, but they fit the situation perfectly. Gaining flexibility and a stronger buying position is an excellent trade-off.
Whether you sell first, get a bridge loan, HELOC, or whatever, there is much more to consider than when you bought your home. From our standpoint in helping you decide, there is also much more diligence that we need to do. We’ll likely ask for complete income documentation and running credit (at least a soft pull). We are committed to doing the work to give you reliable options.