Purchasing a new home is complex enough. Add in the stress of coordinating the search for your new dream home and closing on the sale of your current one, and the entire process can feel overwhelming. The good news is you have options.
A contingency offer tells the seller the offer you are making on a home is contingent, or dependent, on your home selling at or before the closing date of the one you are looking to purchase. In a seller's market, there may be multiple bidders on the home you want. A buyer without a contingency offer may have a better shot at securing the home purchase contract. However, many sellers are willing to consider a contingency offer.
The upside to this is that it is a seller's market, and you are also a seller. Homes are selling very quickly, so a gap in time between selling and buying is much less likely than in times past.
Bridging the Gap
Sometimes your dream home wants to be found even before you are ready. If you've found your new home but can't get your current home closed in time for the new home closing, a bridge loan may be the solution. As a bridge joins the gap between two pieces of land together, a bridge loan covers the gap in time between two different home loans. There are two ways this may be done.
- Two loans. You need your home to sell to have the down payment for your new home, but those two events just aren't lining up. One option is to borrow the difference in your current mortgage balance and up to 80% of your existing home's value to use as the down payment on your new home.
- One loan/two purposes. This option functions like a cash-out refinance. You take out one loan for up to 80% of the value of your current home. The funds are used to first pay off your current mortgage, with the balance of the loan being used for your new home's down payment.
The value in making at least a 20% down payment on your new purchase is the ability to avoid private mortgage insurance (PMI), which is required if you don't make a 20% or more down payment. This insurance is an additional cost in your monthly mortgage payment.
Bridge loans require a good credit rating and substantial equity in your existing home and typically have a higher interest rate than a standard mortgage. While bridge loans may be a good short-term solution, they should be considered carefully. If your home takes longer to sell than anticipated, what first seemed to be a short-term crunch to get into your new home, could turn into a financial crunch.
This type of loan is often used for other purposes - such as paying down credit card debt. It has a fixed loan amount with a fixed interest rate and fixed term. This could be an option in lieu of a bridge loan if you qualify. It also requires excellent credit and equity in your current home.
Home Equity Line of Credit (HELOC)
A HELOC allows you to borrow against the equity in your home. You are approved for a certain loan amount, but interest only accrues on this amount once you utilize it. The downside of a HELOC as a substitute for a bridge loan is that it will likely have to be in place before your home is on the market. Most lenders won't approve a HELOC for a home already on the market.
While it can be confusing trying to figure out what option is best to allow you to bridge the gap between your old and new home mortgages, there are tons of professionals near you who want to help. Reach out to a local expert loan officer at First Savings Mortgage for help in navigating the best course to your new home.