We get the below questions so frequently now that I thought I’d address them in a blog again.
“Should we buy a new house before selling our current house?”
“And, if so – what are our options?”
Buyers ask these questions because they are nervous about being left homeless if they sell first – given the tight inventory conditions that remain in many markets.
The answers we give depend on the level of income, equity, and available cash that our buyers have.
Here are four options for people who want to buy a new home before selling their current home.
Home Equity Line of Credit (HELOC)
This option is the cheapest (as it is often free), and it is fairly easy. It only requires sufficient equity, income, and credit to qualify. Credit scores need to be above 680 in most cases, and borrowers can get equity lines up to 90% or 95% combined loan-to-value, depending on the lender.
HELOC rates are tied to the Prime Rate (currently 8.5%) plus a margin from 0% to 3.0%, depending on credit score and equity level. Payments are interest only.
Pros:
- Low cost and easy
- Provides access to ample cash
- Interest only payments
Cons:
- Time it takes to obtain
- It could make qualifying for a new home more difficult
EasyPath – Eliminate Payment Tied to Current Home (for qualification purposes)
JVM’s EasyPath Mortgage Program allows borrowers to eliminate their current housing payment for qualification purposes. The program is simply an agreement by our investor to buy the borrowers’ home for a fee of $2,500. Lenders allow us to eliminate the full housing payment for the departing residence (current home) if that home is pending for sale. Borrowers need to have an equity cushion of at least 25% to qualify for this option, and there are numerous other requirements as well. Readers should review our EasyPath page for all of the details.
NOTE: This program can be used in conjunction with the HELOC option discussed above – and this combination is our most frequent recommendation.
Pros:
- Much cheaper than a bridge loan
- Makes qualifying for a new mortgage much easier
Cons:
- Does not provide any cash
- Costs $2,500
Bridge Loans
There are numerous bridge loans available right now, but our most recommended option is set out on our Bridge Loan page. It allows borrowers to borrow up to 75% of the value of their current home. There are no payments due at all, but borrowers have to sell their home within 7 months and they have to pay the bridge lender 2.3% (Bay Area) or 2.4% (the rest of the world) of the sale price of the home when they sell.
Pros:
- Provides ample cash
- No payments due (making qualifying for a new home easier)
- Fast – can close in 14 days
Cons:
- Expensive at 2.4% of sale price – BUT, that cost often ends up being much cheaper than the fees and interest rates associated with other bridge loans
- Requires substantial equity (25% equity cushion remaining after the loan closes)
Keeping Current Home as a Rental
I really like this option if borrowers can afford it and have a very low rate on their current home. This is because rentals like this are triple inflation hedges. Low-rate mortgages are both inflation hedges and assets, as I explain in this blog: Why Inflation Makes Your Fixed-Rate Mortgage An Asset. Homes, as hard assets, are excellent inflation hedges in general as they appreciate with inflation unlike many other assets, particularly cash. Rental income is also a great inflation hedge, as landlords can raise rents with inflation. In addition, we can use the future rental income to help borrowers qualify for a new residence.
Pros:
- Can keep the benefits of a fixed low-rate mortgage
- Rental homes are excellent inflation hedges
- Rental homes can provide a second source of income
Cons:
- Borrowers become landlords – with all of the related responsibilities
- Vacancies can create strains on finances
- Can make qualifying for a new residence more difficult if future rents are insufficient to offset housing payment
