Buying a new home without going through the hassle of selling an existing home (and the risk of homelessness) is something that most sellers desperately want to do.
I know this because of the surprising (and even shocking) popularity of our bridge loans. In light of that, I wanted to highlight and summarize the best options for people who want to buy before they sell.
6 Ways to Buy A New Home Before You Sell Your Current Home
Home Equity Line of Credit (HELOC)
I have been recommending that sellers get HELOCs before they list their properties for years now. HELOCs allow sellers to access funds for home improvements for their existing home (to make it more marketable) and for down payments and closing costs for the new home. They are also very low cost or free in most cases, and interest is only accrued if funds are actually borrowed (as a reminder, HELOC borrowers have no obligation to “draw” on or borrow against HELOCs). Homeowners have little to lose by applying for a HELOC, but they will not be able to get one once their home is listed.
EasyPath
I have blogged about our EasyPath option several times over the last month. This option does NOT provide any funds. What it does do is enable people to eliminate the housing payment for their departing residence, thus making it far easier to qualify for financing for a new residence without having to sell their current residence. EasyPath simply offers a guarantee to purchase the departing residence if a person cannot sell it within 120 days – and that guarantee is all underwriters need to see to enable borrowers to eliminate departing residence housing payments. EasyPath charges $2,500 for this guarantee.
Bridge Loans
Many bridge loan options offer cash against a departing residence, but our most popular option (by far) works like this: our bridge lender will loan up to 75% of the value of the departing residence, taking out the existing first mortgage and providing cash to the homeowner – with NO payments due! The “no payments due” aspect along with the cash is what allows people to qualify for financing to purchase a new residence. The fee for these loans though is 2.3% to 2.4% (depending on area) of the total sale price of the departing residence when it does sell. While this fee may seem high, it still ends up being lower than the total interest and fees often charged for other types of bridge loans.
Renting Out The Current Residence
Lenders can use 75% of the rental income from the current/departing residence to help qualify for the purchase of a new residence. For “proof” that the house is rented, Fannie Mae and Freddie Mac only need to see a copy of the lease and a “rent survey” from an appraiser that shows the lease is at or below the “market rate.” Alternatively, borrowers can show a copy of the lease and copies of the checks for the first month’s rent and the security deposit (I should add that this is the only option for FHA). Some lenders, however, require all three items: (1) a copy of the lease; (2) a rent survey; and (3) copies of the security deposit and the first month’s rent checks (or deposits or wires or similar).
Note: Some lenders ONLY require a “rent survey” and nothing else for the current/departing residence, but the qualifying requirements for the new home are slightly more stringent with respect to “reserve requirements.”
Prove That The Sale Is Pending
Most lenders will eliminate the housing payment for the current/departing residence – if borrowers can prove the sale of the current/departing residence is actually “pending.” Borrowers need to provide a copy of the fully executed purchase contract along with proof that all contingencies have been lifted. Note: The current/departing residence sale does NOT need to close before the new residence purchase closes.
Do Nothing.
This is a reminder that we often get well-heeled borrowers who can easily qualify to finance the purchase of another home without selling their existing home or doing anything else. These borrowers either have substantial income, substantial liquid funds, and/or a very low housing payment for their existing residence.
