It’s especially important to know how to buy a new home before you sell your old home in a hot market. Sellers really won’t accept your offer if you have a home to sell first.
The classic way to tackle this conundrum is to get a bridge loan. Let me be honest: I don’t really like the bridge loan anymore because they tend to incur a lot of costs. First, you have the closing costs and appraisal fees, then there’s the process of pulling the equity out of your old home, and after that, you’ll again incur appraisal fees and closing costs for the new home.
As it turns out, there’s a less costly way to go about this: simply getting a home equity line of credit (HELOC) on your current home.
For example, if your house is worth $100,000 and you still owe $70,000 on it, that means you have $30,000 in equity. You should be able to pull 80% of that equity, or about $24,000. You can take that money and turn it into your 10% down payment on your new, $240,000 home.
This process is very inexpensive—it costs just a few hundred dollars to originate the HELOC, and often, there’s no appraisal fee at all.
Of course, when you get a loan on your new house, you’ll still have to qualify for the payment, which can be a stressor, and you still have to make sure that you can sell the old house quickly so that you’re not enduring two payments for very long. However, in this market where houses are selling quickly, this is a very doable process.
An even better way to solve the issue of the dual transaction is to get a low money down conventional loan with a recasting option. Let’s say your new home is $240,000, and you come up with the 5% down payment from your own savings. You simply purchase the home with that down payment.
Again, you’ll have to qualify for both the payments on your new home as well as your old home, but with this option, when you sell the old house, you can take all of that home’s equity and put it down on the new house. For just a few hundred dollars, a lender will recast the loan, acting as if that extra equity is all down payment. This allows them to lower your payment in proportion to the new equity.
The loan recasting program is fantastic, and it’s rapidly becoming my favorite way to settle a dual real estate transaction. I personally know two lenders who have the option to recast a loan, so if you’re interested in finding out who they are, or if you have any other questions, please reach out to me. I’d be happy to help and/or refer you.