By Scott Schulz, Vice President, Mortgage Lending, Core Bank
One of the most common questions I receive from current home owners looking to upgrade, is finding a way to tap into their existing home equity when they wish or needing to close on a new home before selling their current one. Whether the new home needs renovations before moving in, the timing isn’t right to close on the sale and purchase on the same day, the seller of the dream house won’t accept a contingent contract, or the new house will be new construction with a closing months away on a date that is far from certain… can they buy before they sell?
A recent inquiry came from a woman looking to relocate from Colorado to Kansas City. Her home in Denver was mortgage free, and likely to sell for more than the price range of homes she was looking to purchase. But she didn’t want to sell her home and move into temporary housing while she shopped. And several of the listings she had reviewed weren’t accepting contingent offers. So we discussed her range of options:
Home Equity Loan/Line of Credit
HELOANs or HELOCs, as they are often referred to, allow the home owner to borrow against the equity in their current home with a loan or line of credit usually placed in second lien position. Payments are typically based only on interest, keeping total monthly obligations affordable, while allowing the borrower to come up with funds for down payment or earnest money on the future home. This is a great option when making improvements prior to putting the current home on the market. When the current home is sold, the home equity loan and any mortgage(s) on the home are paid off.
A bridge loan is used by the buyer to finance the purchase of the next home before the current home is sold. Usually a bridge loan replaces any existing mortgage(s) on the current home with a new interest-only loan that also allows the owner to pull out existing equity to use for a cash purchase or down payment on the future home. Once the current home is sold, the bridge loan is paid off.
Using the combination of a first and second mortgage, the borrower can finance up to 95% of the future home but avoid the need for mortgage insurance. Mortgage insurance is required when a first mortgage exceeds 80% of the value or the purchase price. When the current home is sold, the second mortgage can be paid down or paid off, leaving the owners with the loan they desired.
In some instances, there may be enough equity in the existing home to cross collateralize one loan with both properties. Once the former home is sold, or a large infusion of funds is available such as a bonus or sale of another asset, the loan balance is paid down to the point where the former home is released as collateral… leaving one mortgage on the new home.
Core Bank offers all these financing options! But buyers need to plan ahead to explore all their options. Home equity or bridge loans must be established before the existing home can be listed for sale.
Please contact me so we can have you ready for the buying season!