Buying a House Before Selling the House In Which You Live
who wants to exchange the house in which she lives for another one that
better meets her current needs and capacities can save herself much
grief and expense by buying the new house before selling the old one.
Buying the new house first means having to move only once instead of
twice. The downside is that financing a house purchase when you already
own a home is more difficult. Coping with these difficulties is the
subject of this article.
Financing a Purchase Is More Difficult
For an Existing Homeowner
When a homeowner applies for a mortgage to purchase another
house, since the borrower can permanently occupy only one house, the
practice is to view the purchased house as the borrower’s residence,
leaving the existing house as an investment property. Investment loans
are riskier than loans secured by a permanent residence.
Since the applicant for a new purchase loan is viewed as having
a risky investment property, the payment reserve requirement – the
number of months of monthly payments the borrower must have in the bank
at closing – is higher. Further, the expense-to-income ratio used to
assess the borrower’s ability to make future payments will include the
payment on the existing mortgage as well as the payment on a new
For these reasons, the purchaser may find it difficult to
qualify for a loan from a traditional mortgage lender, which raises
questions about other potential sources.
Borrowing Against 401 K Account
If the borrower has a 401K retirement account and her employer
permits loans against it for the purpose of buying a house, which most
do, this is a low-cost and usually a low-risk way to finance the home
purchase before selling the existing house. It avoids collateral and
affordability issues because no lender is involved – the borrower
is lending to herself.
The cost of borrowing against a 401K account is the earnings foregone on the amount borrowed, which is no longer earning a return. The risk is that if the borrower loses her job, or changes employers, she must pay back the loan in full within a short period, often 60 days. If she doesn’t, it is treated as a withdrawal and subjected to taxes and penalties. While 401K accounts can usually be rolled over into 401K accounts at a new employer, or into an IRA, without triggering tax payments or penalties, loans from a 401K cannot be rolled over.
Unsecured Bridge Loans
If you have a binding contract of sale on the old house, and a
bank with which you have a history, a bridge loan is the way to go. A
bridge loan 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 to
close on the new home purchase before closing on the old home sale.
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 covered by the
loan 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 unless the borrower is already a customer. For this reason, you should go to the institution where you currently hold your household deposit, and let them know (in a polite way) that as a customer, you expect this service.
If you don't have a binding contract of sale, you can’t get an
unsecured bridge loan, but if you have significant equity in the house,
and if the house is not yet listed, you can probably get a home equity
line of credit or HELOC. With a HELOC, you can draw the amount you need
to close on the new house, subject to a maximum draw.
If your old house is listed for sale, however, a HELOC may not
be available. Lenders are not much interested in a deal that will last
only a few months. If they go ahead on a home that is listed for sale,
there likely will be a cancellation charge, and you may have to pay
closing costs that they ordinarily waive to attract new customers.
House Flipper Lenders
The aftermath of the financial crisis included large numbers of
foreclosed homes placed on the market, most of which required work to be
habitable. In response, large numbers of people went into the business
of buying these houses, fixing them up, and reselling at a profit. They
are called “house flippers”, and a wave of new lenders arose to finance
Homeowner looking to buy before selling who are shut out of all the sources discussed above, can try a house flipper lender. They would not be interested in the permanent loan on the new house, but they might be willing to finance the purchase subject to repayment when the existing home is sold. The price will be high, but that matters little when the period is short.