“It’s an individual decision whether to sell first or buy first that depends on people’s finances and their own risk profile,” said Christine Fischer, an agent with McEnearney Associates in Arlington, Va. “The least risky decision is to sell your property first, so you know for certain what the proceeds are, then move into a rental property while you look for something to buy.”
Of course, that decision means buyers spend more money on the rental and on moving twice, Fischer said.
“Right now, with inventory so low, almost everyone is looking to buy first to make sure they can find something they want instead of being forced to buy something in a hurry,” she said.
Christopher Suranna, an agent with RLAH Properties in D.C. and president of the Greater Capital Area Association of Realtors, said some clients have enough cash or accessible home equity to buy first.
“A couple of clients I worked with recently had plenty of equity, so they had the luxury to shop for their new home, move in and then concentrate on getting their former home ready to sell,” Suranna said. “In a perfect world, you’d have funds for your down payment and a preapproval for a mortgage, prep your house for sale and premarket it as ‘Coming Soon.’ Then, as soon as you got the house you want under contract, you’d put your current home on the market, and it would sell in a week.”
Alternatively, if you think your home might take longer to sell, you could list it for sale with a contingency that you find and buy the home of your choice before closing, Suranna said.
Still, the decision to buy or sell first is almost never simple.
“It’s important to find out what buyers want and whether it’s available in their price range,” Fischer said. “Then we can look at their property to talk about getting it ready to sell. We can recommend vendors who can estimate the cost to fix it up.”
Armed with information about the cost and availability of homes, along with an estimate of the value of their own home and how long it might take to sell, homeowners can start to investigate options for financing the move.
When you want to sell one home and buy another, it’s time to bring in professionals to help you understand your choices, industry experts said.
“Even if you’re not sure what steps you’re ready to take, it’s important to get educated about your options by a lender, get preapproved for a loan and get a Realtor to talk to you about market conditions,” said Christopher Davis, assistant vice president of business development in real estate lending for Navy Federal Credit Union, which is headquartered in Vienna, Va. “Lenders have some flexibility at the preapproval stage, so you can find out how much you can borrow if you plan to sell first, and how much you can borrow if you plan to close on the next home before selling your current home.”
Some borrowers will have to sell the home they own — and eliminate the mortgage payment from their monthly cash flow — before they buy another home with another home loan. But some have options that depend on how much home equity is available, said Gregg Busch, vice president of First Savings Mortgage in McLean, Va.
“A traditional bridge loan is a loan based on the equity in your home and the anticipated equity in the next home,” Busch said. “Borrowers have to qualify based on their credit and their debt-to-income ratio to pay for their existing mortgage payment, their new mortgage payment and the bridge loan payment. The debt-to-income ratio must be no higher than 43 percent.”
Your debt-to-income ratio compares the minimum payment on all recurring debt with your gross monthly income. For example, if your gross monthly income is $15,000 and your minimum debt payments amount to $6,000, your debt-to-income ratio is 40 percent.
Bridge loans are short-term loans, typically for six months to a year, which are meant to “bridge” the transition from one home with a mortgage into another home with a mortgage. Borrowers use the proceeds from the loan for the down payment on their new home. Bridge loans typically have higher interest rates than a conventional mortgage, but often the payments are interest-only. You can contact various lenders to compare fees.
Borrowers usually repay the balance of the bridge loan with proceeds from the sale of their home, but in this current sellers’ market, when houses sell fast, many people never make a payment on their bridge loan, Busch said.
“For borrowers who don’t qualify for a traditional bridge loan, we also offer what we call our ‘acquisition bridge loan,’ which can be structured more like a line of credit and allows up to a 100 percent debt-to-income ratio,” Busch said. “With these loans, we’re more concerned with the equity being available to pay off the loan when it’s due. The interest rate is higher than other loans, but at least 30 to 40 percent of the time no one has to make a payment at all because their house sells.”
The main benefit of bridge loans is that home buyers don’t have to move twice (first to a short-term rental, then to the new home), which has both financial and emotional costs, Busch said.
The low-down-payment option
Buyers who can qualify for both their current mortgage payment and a new mortgage payment may be able to make the transition to their next home with the help of a low-down-payment loan.
“If we know someone is selling, we can be a little more flexible on the debt-to-income ratio,” Davis said. “We also have up to 100 percent financing, including our Homebuyer’s Choice and Military Choice programs that don’t require mortgage insurance. They both have a slightly higher interest rate than the going rate, but that way they don’t have to worry about making a big down payment before they sell their house.”
Navy Federal, like some other lenders, offers a special program that they call a No Refi Rate Drop.
“After six months of payments, if interest rates on the Choice loan programs have dropped, the borrowers can pay just $250, and we will drop their interest rate,” Davis said.
While some buyers intend to refinance when mortgage rates decline, another available option may be to “recast” the loan on your new home after the other home sells. Refinancing converts your loan into a completely new mortgage with a different term, balance and interest rate, but recasting simply recalculates your payments based on a new balance.
If you take out a mortgage to buy a new home and then sell your old home at a profit, you can recast the new loan by using that profit to pay down the balance. The rate and term stay the same.
“You need to notify the lender that you want to recast your loan and write a separate check, then they can calculate the new payment,” Busch said. “You have to make sure your lender offers recasting if you intend to do this.”
Typically, the lender will charge a fee of about $500 to recast a loan, he said.
Other ways to buy before you sell
Homeowners who have a home equity line of credit (HELOC) in place can borrow against that credit for a down payment and closing costs if they buy a new home before selling the old one, Fischer said. She recommends getting one at least a few months before you plan to sell.
“HELOCs and home equity loans are meant to be long-term loans and often have penalty fees if you pay them off too early,” Busch said. “If you’re planning to sell, you may not qualify for one.”
Move-up buyers — looking to purchase a more expensive home — may want to borrow from their 401(k) for the down payment and then repay it as soon as they sell their current home, Fischer suggested.
Some move-up buyers can borrow from their parents or take out a “margin loan” against their stock portfolio for their down payment, Busch said. They can repay the amount owed as soon as the old home sells, he said.
“Either way, you still have to qualify for both your current mortgage and the new loan,” Busch said.
Homeowners with plenty of equity will find it easier to qualify for a special program, like a bridge loan, Suranna said.
“Open lines of communication with everyone are key for a better outcome,” he said. “Talk to your agent and contact some smaller lenders who can be more creative and have plenty of financing options.”