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Need to Sell First? Here Are Your Options. While most buyers are in the financial position of needing to sell their current home before they can purchase a new one, many feel very strongly that finding the "right" new home will take be more difficult than selling their current one. I am very sympathetic to these buyers, because in a decent market, a well-priced home should sell quickly, whereas a dream home may take months to find.
Home Sale Contingencies in the Chicago Market
In an ideal buyers' world, sellers would readily accept Home Sale contingencies as part of an offer; unfortunately, this is not the reality in the Chicago area markets. Home Sale contingencies state that the buyer must sell his current home before closing on the new one. Usually, that buyer has listed his home with an agent (or will immediately do so) but has not yet secured a contract for purchase. The danger to the buyer is that if a stronger offer arrives on the new home, they may lose the contract if they don't waive the contingency within a given time frame (24-72 hours are typical). Many simply cannot waive the contingency, because they are not financially strong enough to qualify for a bridge loan or hold two mortgages. For this reason, timing and pricing are absolutely critical when it comes selling to buy.
Home Sale contingencies are rarely seen on desirable, well-priced properties merely because the seller can reasonably expect competing buyers to place offers without them. Where I see them used most commonly are on properties with long market times. Another trend I see is that homes with House Sale contingencies tend to close at close to asking price. Offering a high price is one of the only ways to induce a seller to accept the offer at all.
When you pair a home with a long market time with a buyer who is willing to pay a good price for the security of knowing that they will have the time they need to sell first, the situation can be ideal for all involved. There's some risk to the buyer that a better offer may come along, but usually buyers find that preferable to being locked into an impossible mortgage situation.
Avoiding a Home Sale Contingency
If, however, you're a buyer for whom a Home Sale Contingency just won't work, you are faced with two options: secure financing to cover a possible overlap in home ownership, or put your home on the market and don't place an offer on a new home until you've gotten through the attorney/inspection period on your current home. In the latter case, you'll still want to put a Home Closing contingency, but sellers will feel far more secure if you can provide evidence of a strong contract that has already cleared the A/I period.
Financing Options
The mechanics of a solution to any situation will involve some important questions as to your financial strength, including your borrowing capacity and equity in your current home. Selling your current home first accomplishes two things: first, it extinguishes a large debt, which impacts the qualifying ratios, and second, it provides closing funds for the down payment and closing costs.
In recent years, the number of different mortgage programs has greatly expanded, so there are a number of options available. Which option (or combination of options) works best for you will, of course, depend on your circumstances. Please contact me with the specifics of your situation and I will be happy to discuss your best options with you.
Bridge Loan
The bridge loan is the most common choice. A bridge loan will finance the new home AND pay off the mortgages currently in place. A bridge loan will finance a maximum of 80% of the appraised value of your current home. The bridge loan will also finance the closing costs and 6 months of interest. The net effect is that there is often less equity available from the bridge loan than buyers originally anticipate. The main advantage of the bridge loan is that you only need to qualify on one loan, for the home you are buying.
Home Equity Line of Credit
This option is similar to a bridge loan, but is often cheaper. In most cases, you can finance up to 100% of the appraised value of your current home so more funds can be made available to put down on the home you are buying. However, you need to actually qualify for three mortgages, the mortgage on your current home, the home equity loan and the mortgage for the home you are buying. You will need to apply for the home equity loan before you list your home.
Qualifying holding both mortgages
This is the most straightforward option. You simply apply for the loan on the home you are buying. You will need to have funds available for the down payment and need to qualify for both mortgages. New underwriting software, which allows much higher ratios, is opening this option to many more buyers than ever before.
No Income Verification (NIV) loan
If you don't qualify for the mortgage on your new home because of higher qualifying ratios, you may want to consider getting a loan that does not require income verification to qualify. With this option, you will still need to have funds for your down payment and closing costs.
Gifts
Gifts from family members are an excellent way to make down payments. Tax effects can be minimal if the limit falls under the gift tax limits (currently $11,000 per person)and the proper reporting procedures are followed. Keep in mind that the limits are per person, and so a couple may borrow from their parents as much as $44,000 without incurring a penalty. Talk with your tax advisor if your family members are able and willing to gift you money.
Sell your home
Of course, the simplest solution is to secure a contract on your current home. Contact me for a complete comparative market analysis and an honest, upfront assessment of your situation.
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