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Finding the right house can take time, but the search doesn’t have to start after you’ve sold the one where you currently live. Maybe the perfect house hits the market before yours is even listed. Maybe you don’t want to deal with the pressure of moving twice. Either way, you can buy a new home before selling your current one, but it can create financial pressure. It’s best to be prepared and know your options before you make any decision.
Timing Can Make Things Complicated
Most lenders calculate what you can afford based on your current income and debt, which means any existing mortgage still counts as debt until it is paid. Bearing two mortgages at once, even briefly, can push your debt-to-income ratio past what a lender will approve. You also need cash for a down payment on the new place, and a big chunk of your net worth may be tied up in your current home’s equity. So the question is: How do you access that equity before the sale actually closes?
A bridge loan can help ‘bridge’ that gap.
Bridge loans are a type of short-term financing secured against the equity in your current home. They’re actually designed to cover costs during the transitional period, so your lifestyle doesn’t get affected when you buy a new home before selling your current one. Taking out a bridge loan gives you cash for a down payment, or sometimes the full purchase price, while your old home is still on the market.
These loans last six months to a year and are paid off as soon as your current home sells. Because interest rates are higher than standard mortgages and availability varies by lender, it is best to ask early on who offers bridge financing in your area and what documentation they require.
Other Financing Options When You Buy a New Home Before Selling
If a bridge loan does not fit your needs when you buy a new home before selling your current one, there are other ways to use your equity.
- Cash-Out Refinance: Replacing your current mortgage with a larger one lets you pocket the difference in cash, then put it toward a down payment on the new house. Unlike a bridge loan, this replaces your existing mortgage entirely rather than creating a second loan on top of it. The trade-off is that you’ll reset your loan term and your interest rate, which matters if you locked in something favorable years ago. It also lasts longer than a bridge loan, so this option works best when you’re not on a tight deadline.
- HELOCs: If you’ve built up equity and don’t need all the cash at once, a home equity line of credit can cover a down payment without the higher cost of a bridge loan. Open it before listing your current home, though, since lenders typically won’t approve one on a property already under contract. Timing matters more here than with almost any other option on this list, so plan several weeks ahead if you’re leaning this way.
Whichever route you take when you buy a new home before selling your current one, lenders will scrutinize your DTI closely. Carrying a mortgage, a bridge loan, and a new mortgage application all at once can be risky, even with high income. Pay down other debts ahead of time where you can. Small balances on credit cards or car loans add up fast when a lender is running the numbers, and clearing even one can change how your application looks.
Before You Buy, Weigh the Market on Both Sides
Buying in a rising market means you need to act fast to avoid paying more later. Selling in that same market can work in your favor, since demand pushes offers up and shortens the time your house stays listed.
A falling market, on the other hand, flips both calculations, so factor in where local trends are actually headed, not just what worked for a friend last year.
Final Word
There’s no perfect time to buy a new home. If timing is a concern, a bridge loan, a cash-out refinance, or a HELOC can solve the problem, and choosing the right one comes down to your equity, your market, and how much risk you’re willing to take short-term. Talk with a lender if your planning to make the move now, so you know what you can afford and how each option affects your finances.
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Original source: https://homebusinessmag.com/blog/home-sales/buying-new-home-before-selling-current-one-what-know/