Bridge Loans & Recasts: How to Buy Before You Sell
I recently met (via zoom)with a client who has very sensitive health issues. He and his wife are not interested in having strangers walk through their home, and being forced to leave the home on a regular basis for showings. They asked if we could explore ways they can purchase their new home first, and then put their old house on the market after the move out. I have other clients who want the flexibility to watch the market and pounce on their perfect home, whether or not their current home is on the market and under contract to sell. This can be very valuable in a low inventory market such as our market today. I’ll share here the answers I gave to those clients, and you may be surprised how simple and affordable it can be.
A Bridge Loan can be the key to buying your new home before you sell your old home.
Recast: A simple solution for those who don’t need a bridge loan.
Of course, we will always look for the simplest and most affordable solution first. In this case, that means looking to see if you can come up with the minimum down payment on the new home (usually 5% for a conventional loan) and if have enough income to qualify to carry both mortgages for a time. If both of those answers are yes, then we can proceed without a bridge loan. For the down payment, many of my clients have turned to their 401(k) for a temporary loan.
After you move in, and after the previous home sells, you will be able to repay the 401(k)loan and make a lump-sum payment on your new mortgage. The key here is to make arrangements with the servicing lender for a recast before you send in the lump sum. A recast is simply a re-amortizing of the new loan balance using the current interest rate and remaining term of the mortgage; It is not a refinance, and usually costs very little. (Perhaps a few hundred dollars for a processing fee.)
This lump sum can also serve to remove any mortgage insurance (assuming your new loan amount is less than 80% of the original purchase price). When the dust settles, the end result is the exact same mortgage with the same payment as you would have gotten if you had sold your home prior to buying the new home (or on the same day.)
Bridge Loan: A key that can open many doors
For those who don’t have cash readily available, or the income necessary to close on the new home prior the sale of the existing home, a bridge loan can be a great solution. These are usually offered by a 3rd party company who will lend you a large portion of your equity for down payment on the new house. The same company will make a written “back-up” offer to buy your home. If you accept this offer, we are able to ignore the old house payment in your debt-to-income ratio, which will help you qualify for the new home. This “back-up” offer is probably not going to be a very exciting purchase price, but the 3rd party company will give you and your real estate agent plenty of time to continue marketing the home to other buyers. The bridge loan is often given at the same time, from the same company, for free ($0 interest and $0 fees). This is a new innovation in our market. Instead of charging fees on the bridge loan, the 3rd party company collects their fee upon sale of your old home. Those fees usually range from 2% to 2.5% of the selling price. This may sound like a lot, until you consider data like this from the National Association of Realtors showing that well staged homes typically sell for more money, and faster than homes that have not been staged.
I’ll be your guide
As with most things in the lending industry, there are many options and nuances to consider. If you are interested in buying your new home before you list and sell your current home, please don’t hesitate to give me a call. I’ll help you understand all of the options with the heart of a teacher, and I’ll be here to help you make educated decisions that best serve your goals.
Please don’t hesitate to call for more information.