Whether to skip fire alarm style house cleanings and never-ending dog walks for last minute showings or to avoid making contingent offers, buying your new home before selling your current home can make a lot of sense.
Contingent Purchase Challenges
Selling and buying homes at the same time often means buying your new home contingent on selling your current home. In other words, you need to sell in order to buy. Reasons for this include:
- Sale proceeds used for down payment
- Wanting smaller loan amount and need sale proceeds
- Thinking you can’t have 2 homes at the same time
In competitive seller’s markets where more buyers outnumber the homes for sale, contingent offers tend to drift to the bottom of the pile. Seller’s may choose a “cleaner” non-contingent offer instead.
Buy Without A Contingency & Sell Later
Thankfully, several strategies help avoid buying your new home contingent on the sale of your current home. The most effective of which are:
- Recasting Later
- Simultaneous HELOC
- Bridge Loans
Recasting allows for a small initial down payment. Later – after closing on your new home is when the Recast magic really happens. In short, recasing a loan allows you to put a large amount down on the principal balance after the loan has closed. The monthly payment gets recalculated based on the new lower balance and the months remining in the original loan term.
HELOC Helps With Temporary Down Payment
Since buying a home prior to selling often straps buyers for down payment cash, a Home Equity Line of Credit (HELOC) might be just what is needed. The lack of down payment be filled using a HELOC.
For example, imagine a buyer has $50,000 in cash and another $50,000 in equity in their current home that will be used for down payment. Buying before selling means they won’t have the $50,000 in equity up front. In this case, a $50,000 HELOC can substitute for that portion of the down payment. After closing and once their former home sells the buyer then uses the proceeds of that sale to pay off the HELOC.
Use A Bridge Loan
Bridge loans are similar to the HELOC concept except the loan is placed against the home you are going to sell. The bridge loan gives homeowner’s access to equity in the current primary enabling them to use it as down payment funds on their new home purchase. Typical bridge loans are paid off when the home they are tied to is sold.
By Jeremy House