When you have to sell in order to buy
Homeowners looking to buy a new house have a different set of problems to consider than first-time buyers.
NEW YORK(CNNMoney.com) - It's the height of the spring home-buying season and many of the shoppers are families looking to upgrade to bigger or better homes. These house hunters have a different set of issues to confront than first-time buyers.
The biggest one: They can't afford to buy the new one before they sell the old, and timing is tricky.
If they sell the old house before they buy...
Most buyers can't afford to own two properties at once.
But if they sell first, they face the prospect of having to move before they have taken possession of the new place.
In hot markets many buyers prefer to make certain the old home is sold before they commit to the new one. The reasoning is that once they absolutely have to find a place, they'll shop very hard.
"Many of my clients get their house under contract first and then rush to buy a new home," says John Mudd, an agent with Exit Realty Suncoast in the dynamic Tampa, Florida market. "It takes less time to find a new home than to sell the old one," he says.
If they buy the new house before they sell the old one...
Even scarier, perhaps, is that they could end up carrying the costs of owning both homes for a while.
Austin Schuster, founder of NYC Living Realty in the equally hot New York area, says, "It can get tricky when a buyer tries to buy a new home without having a contract on the old one."
"Under those circumstances," he says, "buyers have to be extra cautious in pricing the old home; they have to sell it as quickly as possible. They can't overprice it. They should get at least some offers within 30 days. If they don't, they have to be willing to look at the price point again."
In other words, they may have to be prepared to take less for the house to get a deal done.
There are a couple of ways to deal with the juggling act
Contigency sales Many buyers attempt arrangements with sellers to make the new purchase contingent on the sale of the old one. If the buyers can't sell their home within a period of time, the purchase is cancelled.
Sellers don't like these such arrangements, of course, and are more likely to accept them in slowing markets than hot ones.
But no matter what, asking to buy on a contingency hands the seller a bargaining chip. That can translate into paying more for the property.
Bridge loans It seems that no matter how you go about it, buying one home when you're selling another will cost you money. Either there'll be pressure to accept a lower bid for your old property or you'll be scrambling to find a new one and wind up spending more than you want. What you need is to be able to do is find the best buy on a new home while your old one fetches the highest price the market will bear.
For that, you may need time.
Enter the bridge loan, also known as a swing loan, which can give buyers the time they need to make the best financial decisions.
A bridge loan is just what the name implies; it's a loan that spans the gap between the time you buy a new home and you sell the old one.
Bridge loans come in two flavors. The first kind gives you the money to pay off an existing mortgage and to pay down on the new house. You make no payments on the bridge loan, just on the new home. When you sell the old home, you pay off the bridge loan, including interest.
In the second kind, you keep your first mortgage and borrow against the equity in the first home to make a down payment on the second. Let's say your old home is worth $220,000, the new one costs $300,000, and you owe $100,000 on your existing mortgage. That means you have equity of $120,000. You're putting 20 percent down on the new home, which is $60,000.
You can use the bridge loan to pay at least part of the down payment.
In both cases, you're paying interest on two mortgages, but one is deferred until you sell.
Consumers may be under the impression that high fees can make bridge loans costly. But George Hanzimanolis, founder of Bankers First Mortgage Inc. and a vice president of the National Association of Mortgage Brokers, says that's not so. According to him, the interest rates on bridge loans are the same as on regular mortgages, and fees, such as for recording mortgages, should only add a few hundred dollars to the transaction expenses.
"Bridge loan costs are reasonable," he says. "Because banks feel secure; the loan is cross-collateralized by the two properties, so it shouldn't cost any more. And they come from the same lender as the regular mortgage."
"A bridge loan can pay off because borrowers are not forced to sell their homes short, at lower prices," says Hanzimanolis. "They can wait for a better offer."
In an up market, that may add thousands of dollars to the selling price, offsetting the added mortgage interest and fees.
"It can be a very good benefit," says Hanzimanolis.