Homeowners sell their homes and buy other homes for a
variety of reasons including a need to live closer to a
place of employment, to be closer to family, to enjoy a
better climate, or simply to upgrade. This article is about
finding the best sequence of steps in the process.
The Importance of Equity In the Existing
House: Whatever the reason
for the planned exchange of houses, the amount of equity the
owner has in the existing house is often critical. It may
determine whether or not the exchange of houses is feasible,
and if it is feasible, on the best way to sequence the two
transactions.
The equity available in existing houses for use in
purchasing other houses peaked in mid-2006 with the onset of
the financial crisis, dropped sharply over the next 6 years,
and has since come back but not entirely. Data from
CoreLogic indicate that about 10% of all mortgaged homes
still have loan balances in excess of property value.
This widely cited statistics on underwater loans actually
understates the drag of inadequate equity on sale/purchase
transactions because of the high cost of selling a home.
More relevant is what might be termed “useable equity”,
which is the property value less the existing loan balance,
and less the sales commission, transfer taxes and any other
transaction costs.
Minimizing Inconvenience Means Buying First:
The least burdensome way
to make the switch is to retain access to your existing home
until such time as you move into the new one. If you vacate
your existing home first, you have to find a place to live
while you wait, and a place to store furniture and other
effects. This can be a hassle. Whether or not you can
successfully buy before you sell depends in good part on
your financial situation.
Enough Income
and Cash: In the most
favorable situation, you have enough income to carry two
mortgages; and enough cash to meet the cash required to
purchase the new house without having to use any of the
equity you have in the old one. You would contract to buy
your new house first, and arrange for the mortgage you need
to effect the purchase. You then put your old house on the
market, setting a closing date beyond the closing on the new
house. That way, you can stay in your old house until you
are ready to move into the new one.
Enough Income,
But Not Enough Cash: In a
less favorable situation, you have enough income to carry
two mortgages, but not enough cash to close on the new one.
You need to cash-out some of the equity in your existing
house.
The simplest way to get it without selling your existing
house is to take out a home equity line of credit (HELOC) on
that house. Then, you have the same flexibility as in the
first case. You can take whatever time you need to find the
house you want to buy, following which you sell the old
house and pay off both mortgages. Two articles on this site
will tell you want you need to know about HELOC s:
What Is a HELOC?
and
How Do You Shop For a HELOC?
Warning! Take out the HELOC well in advance of your
purchase, leaving all or most of the line unused until you
need it, and before you put your existing house on the
market. Lenders don’t appreciate HELOC customers that pay
off fully within a short period.
An alternative to the HELOC, which is simpler and cheaper,
is a short-term loan from a bank, called a “bridge loan”,
but it requires that you have an unconditional contract of
sale on your existing home. The loan bridges the period
between the closing on your new house purchase, and the
closing on your existing home sale; it is repaid when you
sell. The lender’s requirements for a bridge loan are much
the same as those imposed by the mortgage lender who
finances the home purchase, as described below.
Not Enough
Income or Cash: In the
least favorable case, you don't have enough income to carry
two mortgages, or enough cash without the equity in your
current house. This means that you must sell before you can
buy, and the new lender will want conclusive evidence that
this will happen before processing your application.
The lender will want to see an unconditional contract of
sale that has no escape clauses for the buyer, such as a
mortgage contingency clause. Many lenders will also require
a significant non-refundable deposit by the buyer. And the
sale must be a done deal before the new mortgage will be
closed.
In this situation, the only way to avoid having no house in
which to sleep is to close both transactions on the same
day, with the sale transaction occurring first. That may or
may not be feasible.
