Q: I want to buy a new home, but I have one to sell first. What’s the best way to handle this?
A: If you’ve already found a home you want to buy, it can be a tricky situation if you need the equity of out of your old home to pay for the new one but there are a few options you can consider:
1. Consider a Bridge Loan. This is a type of short-term loan typically taken out for a period of 2 weeks to 3 years pending the arrangement of larger or longer-term financing. However with the current financial economy, you will likely need excellent credit and funds in your bank account to qualify for this type of loan.
2. Rent out your Current Home. If you can find short term or month to month tenants to rent your current home – perhaps offering them a slightly under market rental rate for the inconvenience of having to show the home – until it sells, this could be ideal. Also, if you happen to be upside down on your existing home, you cannot short sale it because then you won’t qualify for the new home. However you could rent it out long term, assuming the rental rate covers your existing mortgage. I had a primary residence turned investment property I bought in 2005 at the height of the market and its value has dropped significantly. Rather than short sale it and get a huge ding on my credit, I turned it into a rental to cover the mortgage. I know the value will come back up, and it may take several years, but in the meantime I can use the rental income to offset the current mortgage and thus qualify to purchase a new property.
3. Work with the Seller. Your Realtor may be able to add a contingency to the contract on the new home that you must sell your existing home before you can close. Keep in mind – this may not work on most short sales or bank owned properties because the banks generally want to turn over this inventory as quickly as possible. If you do add a contingency, my advice would be to up your deposit a bit to make it more attractive to the Seller and keep the contingency as short a time period as possible. Pricing your existing home correctly for sale is key in getting it sold fast. If you are purchasing new construction, your Realtor may also be able to add this sort of contingency to a builder’s contract.
As always, consult a Realtor for what may be most appropriate in your given situation and he or she can guide you though this process. Now is a great time to upgrade to a larger home, or even downgrade to a smaller one if the kids have grown and moved out. Interest rates hit 3.75% last week!