Buyers who are “moving up” or “downsizing” often have a dilemma. They can’t decide whether to put their home on the market first, or contract to buy their new home first.
If they put their home on the market, it might sell and then they might find it impossible to find what they want. Alternatively, if they find a home they’d love to buy, they realize they could lose out because their old home won’t sell quickly enough or the sellers won’t wait. What is the best approach?
We’ve noted so many times that there is seldom a “right” answer. This is another such instance. Looking at some of the alternatives and how they could work for you might make it easier to figure out how to approach getting from where you are to where you want to be.
Home of Choice Clause
Let’s say you decide to put your home on the market first because you want to be sure of the amount of money you’ll have to work with. You (or your Realtor if you have one) can market it with the provision that settlement is contingent on your finding the home of your choice.
Thirty days is typical for a “home of choice” clause, but I’ve seen periods of time at lengths as long as sixty, ninety, or even one hundred twenty days. Wording often runs something like, “Settlement hereunder shall be contingent for up to sixty days on Seller’s finding and contracting to buy the home of his choice.” That can take the pressure off and give you breathing room.
Home Equity Loan
You could apply for a home equity line of credit (often referred to as a HELOC) before you put your home on the market. If you have a significant amount of equity in your home, this can provide you with down payment and closing costs for your new home.
You can then shop for a new home and write a contract contingent on the sale of your old home. If the seller will not accept the contingency, or if you are in competition with a buyer who does not have a “sale of home” requirement, you could choose to remove the contingency.
If you had a non contingent contract to purchase, you’d want to quickly put your old home on the market and get it sold so you wouldn’t face the prospect of two mortgages to meet. Still, if part of what you’d borrowed could cover down payment and closing costs, and part could be set aside to meet the old mortgage payments for a few months, it could work with no financial strain.
Borrowing out home equity at the beginning of the process doesn’t lock you into anything. It just gives you more options.
A Bridge Loan
Let’s explore another possible scenario. Let’s say you decide to put your home on the market and get a contract on it before looking for your new home. You (or your Realtor) begin to market it. Your home is getting lots of showings and you’re sure you’ll get a contract soon.
You decide you’ll do some preliminary shopping for your new home “just to see what’s out there.” You find the “perfect” home and “fall in love” with it before you get a contract. The seller will not accept a contingent contract. Is there any way you can avoid losing out on the purchase of this home?
It isn’t cheap, but if you have very good credit and a lot of equity in your home, you can probably get a bridge loan to buy the home you fell in love with. Generally bridge loans have a high rate of interest and are for a period of six months. They can usually be renewed for a second six month period. Typically you can borrow up to eighty percent of the equity in your current house to come up with the down payment you need this way.
As always, there are many choices. We’ve only mentioned some of them here. You might want to start by meeting with a lender to determine specifically what is possible for you. Maybe you can use the ideas in this article as a starting point for the conversation. Who knows where it will lead? It could be the beginning of developing the perfect strategy for you.