Buying a New House Before Selling the Old One
July 19, 1999, revised January 6, 2006, February 22, 2007, May 21, 2007,
June 16, 2008
"I need to use the equity in my existing house to buy a new one, but it looks like I am going to have to close on my new house before I am able to close on my old one…How do I handle this?"
I am assuming you have exhausted all possibilities of borrowing from family, friends or retirement accounts. The next best options are an unsecured bridge loan from a bank, or a secured bridge loan or home equity loan on your current house. Use an unsecured bridge loan if you have a contract of sale on your current home, otherwise use a secured bridge loan or a home equity loan.
A bridge loan is one that is used to provide funds needed for a short period until another source of funds becomes available. In the home loan market, a bridge loan, sometimes called a "swing" loan, allows a home buyer who needs the equity in his old home to pay for the new one, to close on the new home purchase before closing on the old home sale.
A bridge loan lender accepts two types of security. One type is a binding contract of sale on the old house. The lender who knows that on a certain date you will be receiving enough money to repay the loan can avoid the trouble and expense of placing a lien on that property.
I used an unsecured bridge loan on my last purchase, and it was relatively simple and hassle-free. While the rate may be high, the interest payment won’t amount to much because the period is short.
Banks aren’t crazy about bridge loans because they realize they are one-shot affairs and they are unlikely to see the borrower again. For this reason, you should go to the institution where you currently hold your deposit, whether it is a commercial bank, savings and loan association or credit union. If they gave you any flak, let them know (in a polite way) that as a customer, you expect this service, and if you don’t get it you have lots of other choices as to where you hold your account.
If you don't have a binding contract of sale on your old house, you can't get an unsecured bridge loan, but you can get a secured bridge loan or a home equity line (HELOC). Both are secured by the house you are trying to sell, and can be for an amount up to some portion of the equity, perhaps 85% or 90%.
A secured bridge loan is offered by the lender providing the new loan, as an accommodation or a marketing inducement. "Take your purchase loan from us, and you won't have to worry about whether your old home sells before the new one is purchased." The downside of this is that you may not want to take your purchase loan from the lender providing the bridge loan.
A HELOC (line of credit) has the advantage that the HELOC lender is not looking to get your purchase loan. HELOCs are a profitable stand-alone business.
On the other hand, a HELOC lender is not much interested in a deal that will last only a few months, and probably will not go ahead on a home that is up for sale. If they do go ahead, there likely will be a cancellation charge, and you may have to pay the closing costs that they waived to get your business.
In sum, assuming you need cash out of your old house to do the best deal on the new one:
* If your old house is under contract, take an unsecured bridge loan.
* If the old house is not yet on the market, take a HELOC.
* If the old house is on the market but unsold, look for a lender who offers a secured bridge loan.
"I need to use the equity in my existing house to buy a new one, but it looks like I am going to have to close on my new house before I am able to close on my old one…How do I handle this?"
I am assuming you have exhausted all possibilities of borrowing from family, friends or retirement accounts. The next best options are an unsecured bridge loan from a bank, or a secured bridge loan or home equity loan on your current house. Use an unsecured bridge loan if you have a contract of sale on your current home, otherwise use a secured bridge loan or a home equity loan.
Unsecured Bridge Loans
A bridge loan is one that is used to provide funds needed for a short period until another source of funds becomes available. In the home loan market, a bridge loan, sometimes called a "swing" loan, allows a home buyer who needs the equity in his old home to pay for the new one, to close on the new home purchase before closing on the old home sale.
A bridge loan lender accepts two types of security. One type is a binding contract of sale on the old house. The lender who knows that on a certain date you will be receiving enough money to repay the loan can avoid the trouble and expense of placing a lien on that property.
I used an unsecured bridge loan on my last purchase, and it was relatively simple and hassle-free. While the rate may be high, the interest payment won’t amount to much because the period is short.
Banks aren’t crazy about bridge loans because they realize they are one-shot affairs and they are unlikely to see the borrower again. For this reason, you should go to the institution where you currently hold your deposit, whether it is a commercial bank, savings and loan association or credit union. If they gave you any flak, let them know (in a polite way) that as a customer, you expect this service, and if you don’t get it you have lots of other choices as to where you hold your account.
Secured Bridge Loans and HELOCs
If you don't have a binding contract of sale on your old house, you can't get an unsecured bridge loan, but you can get a secured bridge loan or a home equity line (HELOC). Both are secured by the house you are trying to sell, and can be for an amount up to some portion of the equity, perhaps 85% or 90%.
A secured bridge loan is offered by the lender providing the new loan, as an accommodation or a marketing inducement. "Take your purchase loan from us, and you won't have to worry about whether your old home sells before the new one is purchased." The downside of this is that you may not want to take your purchase loan from the lender providing the bridge loan.
A HELOC (line of credit) has the advantage that the HELOC lender is not looking to get your purchase loan. HELOCs are a profitable stand-alone business.
On the other hand, a HELOC lender is not much interested in a deal that will last only a few months, and probably will not go ahead on a home that is up for sale. If they do go ahead, there likely will be a cancellation charge, and you may have to pay the closing costs that they waived to get your business.
In sum, assuming you need cash out of your old house to do the best deal on the new one:
* If your old house is under contract, take an unsecured bridge loan.
* If the old house is not yet on the market, take a HELOC.
* If the old house is on the market but unsold, look for a lender who offers a secured bridge loan.