How can I finance a new home before our present home is sold?
This is a common dilemma, especially for those who need to move for their careers. It's not uncommon to find a new house to buy before your current home sells. In that situation, you might find yourself responsible for two mortgages until your old house sells.
On the other hand, some homeowners must sell their current house first because they will need the proceeds to finance a down payment on the new house. But if they sell first, then they will have no place to live until they buy another house.
In either case, there are some options.
One option is a bridge loan, also called a swing loan. These loans are similar to conventional mortgages in that the lender considers credit history, credit score and your debt-to-income ratio. The difference is that the bridge loan is short term, typically from six months to a year. Terms vary by lender, but some bridge loans don't require payments for the first few months. Others have interest-only payments or deferred payments until you sell.
A lender who makes a bridge loan does so because you have agreed to finance your new home with them.
While a bridge loan may seem like the solution to a moving problem, there are some drawbacks. You'll pay higher interest on a bridge loan and you must have at least 20 percent equity in your current home. If you fail to sell your property, the consequences could be serious, including foreclosure.
You might also consider a home equity loan on your current home to finance your down payment and move. A home equity line of credit (HELOC) could also be used for a down payment on the new home at a lower interest rate and lower closing costs, though some can incur prepayment penalties.