How To Buy A New Property Before You’ve Sold Your Existing One

Tuesday, September 22, 2020, 6:00 PM | Leave Comment

You’ve found it, the property of your dreams! The problem is that other potential buyers are sniffing around it as well.

You need to make your offer as quickly as possible in order to secure your purchase, but the problem is that you haven’t sold your existing property yet.

What do you do?

  • Use Home Equity Line Of Credit (HELOC)

    You might be wondering, first of all, what is a home equity line of credit (HELOC)? It is essentially a second mortgage on your existing property. You can take out a loan against your current property in order to release the capital to cover the cost of your new property, such as the down payment.

    Typically, a HELOC will have a fixed interest rate and a set monthly repayment amount. If you are considering this avenue, you need to be sure that you can sell your existing home relatively quickly; otherwise, you could find yourself paying two mortgages and the loan repayments, which could definitely become unaffordable after a while!

  • Take Out A Bridge Loan

    Bridge loans allow you to take out a loan for the amount that you need to buy your new property, against the value of the new property. Lenders will base their decision to loan you the money principally on the value of the new property, as well as your ability to repay them. The loan will be secured against the new property, so if you cannot repay the bridge loan then your new property could be repossessed.

    Bridge loans are generally repaid over a short amount of time, usually a year.

  • Take A Loan but from Your 401(K) Plan

    If you have a 401(K) plan, speak with your HR department about whether you are able to take short-term loans out against it, and if so, what the interest rates and repayment terms are.

    Generally, loans against your 401(K) plan can be provided fairly quickly, so you won’t need to take out the loan until the last minute.

    Some points to consider are as follows:

    • Many lenders see borrowing from a 401(K) plan as borrowing from yourself, so your debt ratio won’t usually be affected.

    • Understand the terms of the loan. If you intend to repay the loan amount with a lump sum after your existing property is sold, be sure that this is permissible under the terms of the loan.

    • Be sure that you can actually afford to pay yourself back quickly. If you can’t, you could end up worse off in the long run.

  • Sale-Leaseback

    An option for buyers and sellers is a sale-leaseback agreement, which essentially means that you would have included it in the sales agreement that you would rent out the property to the existing owners for an amount of time after the sale, or you would continue to rent your property from the buyers after the sale.

This can be a good solution for when one of the parties doesn’t have another property to go to, but it’s not desirable to keep this situation ongoing for a long period of time, as generally, rent will be charged at market rate, and will therefore be much higher than mortgage payments.

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