Unlock the Potential of “Buy Before You Sell” Loan Options.

Alternative lending includes strategies to buy a new home before selling your current home, often called the buy-before-you-sell loan. This allows you to tap into home equity either as your down payment or, in some markets with sufficient equity in another property, to purchase the new home using equity. Buy-before-you-sell loans can be the difference between securing a dream home and missing out.

Most people don’t realize how many ways there are to tap equity or buy before you sell. It is complicated since each buy-before-you-sell provider markets their version directly to consumers without mentioning the other options, so you would never know your options. Just as each situation is unique, there is more than one way to tap into equity. Though there are multiple bridge lending options, there isn’t a single best solution. Comparing your options and deciding which will work best depends on your situation and location, which determines availability.

For example, you may qualify for all three options explained, but the one that is best for you may be determined by the speed you can close in a competitive situation, thus knocking out other options.

Before we begin, I want to mention alternatives strategies to the buy-before-you-sell options because, if they work for you, they could save you money. The first is using a home equity line of credit (HELOC) to purchase, which was a common practice in the past, is still an option, and the single most cost effective approach in the right situation. But if you need one, banks and credit unions aren’t in the business of opening a line of credit just to close it when you sell. They wouldn’t make money that way. If you don’t already have a HELOC, it may not be possible to get one when you are ready to sell. Lenders generally turn down ‘buying a new home’ as a reason for opening a new HELOC. In some situations, where you already have a HELOC in place, you may be able to use it for some or all of your downpayment and closing costs. Check with your lender.

The other situation in which a HELOC can help is in the case of a second or investment home. With sufficient equity in your primary residence, you may qualify for a well-priced HELOC. However, be aware of the terms and have a strategy to pay it off since most equity lines are adjustable. Contact me for a referral to a good source.

The other alternative strategies include a low down payment mortgage to purchase a primary residence, provided you qualify and the loan does not exceed the conforming loan limit for your area, and HELOC or DSCR, which may work better for investors. If you think any one of these situations may apply to you, let’s go deeper into the detail on each of these alternative strategies here.

Now, let’s discuss with the purchase of primary residence before you sell your current home using the three types of Buy-Before-You-Sell loan options.

Conventional Bridge Loans: Bridging the Gap

Conventional Bridge Loans are the most cost-effective of the three options to tap into equity. They offer a short-term bridge loan based on the equity in your current home and finance the new first mortgage.

This option is particularly appealing for those in a market such as the East Coast or a less competitive situation where an offer not contingent on the sale of a home offers the seller an advantage. This isn’t sufficiently competitive in areas where you compete with multiple offers, especially all-cash, unless the seller is keen to sell to you over other offers.

The reason why is that lenders who offer these mortgages don’t tend to close in quickly; a 30-day close is usually the best you can safely hope to make.

The more significant issue is often one of qualifications. If you currently have a mortgage, you must include that along with the taxes and insurance of the departing residence and the new one, all within a 45% DTI ratio. They will allow you to rent the departing residence, but it must be pre-leased, which means they will require a signed lease and sometimes even the first payment, unlike a decade ago when they would allow you to use the fair market rent as assessed by an appraiser.

Compare these constraints with a conventional mortgage that allows up to a 50% DTI (in some cases a little more) to the next option, where they don’t include the departing residence payments and let you use the lender of your choosing for the first mortgage. You will quickly see how this option is quite restrictive compared to the next two.

It is the cheapest if it can work for your situation. It’s not worth losing your dream home, though, so think twice to be sure the money saved is worth it. In some cases, it will be.

The Newest Breed of Buy Before You Sell Loans: Flat Fee *Available in Select States, including California, Colorado, Texas, and Connecticut.

Pros: Excludes Departing Residence Overhead, One-time Closing, Offer Made without sale contingency, Choose Your Lender on the First Mortgage, Move into New Home While Old Home is Prepared for Market, No Payments on Bridge Regardless of How Many Months
Cons: More Expensive than the Conventional Bridge Option, Departing Residence Must Be Pre-Approved

The Flat Fee buy before you sell option is a great option and the middle ground between the more restrictive option above without the strict requirements of traditional lending. The least restrictive option is private lending, which we’ll discuss next.
The flat fee is 2.4% of the purchase price of the purchase of your new home, which is paid at the sale of your old home. A $500,000 purchase, for example, would cost $10,800.

This may sound expensive if you compare it to the first option. However, if you can’t qualify for that option, this may still make sense due to opening up the option to buy before you sell, giving you the security and convenience of finding your new home first and moving in at your convenience, which is worth a lot in the stress alone but also the savings moving only once.

With this option, the lender will loan up to 75% of the loan-to-value of your current residence as the downpayment on the new house.

We can shop for you for the best loan option for the new first mortgage among the 60+ lenders we are partnered with because, with this option, they are not lending you the down payment only.

The way they structured this program is clever. Fannie Mae guidelines stipulate that the only way you can exclude the departing residence payment is if you have an all-cash, non-contingent offer, so that’s what they do. They write an all-cash, non-contingent offer to close on your home in 90 days. If you don’t sell within those 90 days (and they are confident you will, which is why they pre-underwrite), they purchase the home but allow you and the realtor to continue selling it as planned without interrupting or interfering. They will not require you to take a low offer or pressure the process.

When this product was presented to us, we were concerned about this point. But if the lender were to interfere, they explained, and got a reputation for causing clients to lose profit from selling their homes, no one would use their product. They had a point, and with the success of their program, I doubt they have not interfered with the 2500 transactions to date. It’s a profitable model to lend a downpayment but get paid the points on the purchase price, so it would not make sense to shoot themselves in the foot. It also explains why they have no payments due on the bridge.

Private Money Consumer Bridge Loans: The Most Flexible Solution *Available in select states, including California.
There is no getting around it; the Private Money Consumer Bridge Loan performs like no other loan regarding who it can work for when the other options don’t work, or you are in a highly competitive situation.

Before we jump into the details of how the loan works, let’s take the bitter pill of cost; these options will run you between 2.25 and 4.0 points of the loan amount. This is one benefit to the Flat Rate option above because they charge on the purchase price, not the loan amount. In some instances, that may be the same in both cases and here’s why:

Private money cross-collateralizes your departing residence (any property in which the owner is willing to pledge the property). We’ll get technical for those like me who like to geek out on these things. Otherwise, skip down.
The formula goes like this: Pledged property value + New Home Value = Total Collateral (TC).
Then: All Outstanding Mortgages and Liens on Pledged Property + Bridge Loan for New Home = Total Loan Amount (TLA).
Divide the TLA by the TC for the Loan-to-Value (LTV) ratio.
The investor likes to see a maximum of 70% LTV but will make exceptions for strong borrowers and properties.

This buy-before-you-sell option works particularly well for those with little to no balance due on the mortgage for the pledged property or downsizers. However, it can work for anyone with enough equity and sometimes is the only loan that can be processed fast enough to compete against all-cash offers. This is possible because there isn’t a conventional lender involved. The private lender lends the total amount needed to close on the property and does not need to document what’s called Ability to Repay, or ATR, because it is an 11-month loan, not permanent financing. The investor only needs to know you have an exit strategy and, with all options, will give an extension if needed. They are not in the loan shark business.

The critical advantage of Private Money Loans is their flexibility in qualifying and repayment schedules and their speed to close.
This option is ideal for buyers who may not immediately qualify for traditional financing due to various reasons such as complicated income or no income. Theoretically, a retired person with no income could leverage their existing home to buy a new one with no money down, pay no mortgage during the 11 months during which they are selling the departing residence, and pay off the loan once their old home sells, all without coming out of pocket any cash and with plenty of time to transition.
When considering the “Buy Before You Sell” strategy through alternative lending, evaluating each option carefully is crucial. Private Money Loans offer unmatched flexibility but may come with higher bottom-line costs. Conventional Bridge Loans provide lower costs but require challenging qualification standards. The Flat Rate option presents a middle-of-the-road approach but is more likely to move slower than you need in a highly competitive situation.

Here is a quick chart to help synopsize the benefits of each option. If you have questions or need to discuss your home loan needs, please reach out at your convenience.