Although it makes sense to sell your old house first, most people want to know where they will be living before they close on the deal. Even if your income and credit score qualify you for another mortgage loan on a second home, it can be an expensive and time-consuming option. But if you need the funds to close on your new home before you sell your old house, there are other ways you can get the money to make a down payment and pay closing fees.
Make the offer you put on a new house contingent on the sale of your current home. The seller may agree to the contingency if the house you want to buy has been on the market for a while or there are numerous homes for sale in that same neighborhood and competition is tough. It can also work in your favor if the housing market in which the home you want to purchase is located is slow.
Tap into the equity you have in your current home. If you have adequate equity and meet the lender’s other qualifying requirements for a home equity line of credit, or HELOC, you can access the money to make the down payment on a new house. Pay off the loan once you sell your old home. The catch is many lenders aren’t willing to approve a HELOC secured by a home that’s on the market. Therefore, consider getting funds from a HELOC before putting your current house up for sale.
Borrow the money from your 401(k) plan at work. Although it isn’t always a good idea to take out a 401(k) loan, you may be able to borrow the money to buy a house, points out Bankrate.com. It can be a smart move in this case, especially if you plan to immediately repay the loan when you sell your old home. Check with a tax professional beforehand who can inform you about any tax implications.
Apply for a bridge loan. You can take an unsecured bridge loan as long as you have a binding contract of sale on your old house. The security for the loan is the lender knowing that the proceeds from the sale of your old home will be enough to repay the loan, explains The Mortgage Professor. If your house isn’t yet under contract, apply for a secured bridge loan using the home you have for sale as collateral. Generally, you can get a bridge loan for between six and 12 months. Talk to your current lender first.
Ask your parents or another family member to lend you the money for a down payment. Protect the interests of all parties involved by signing a written promissory note, advises Nolo. Since you will have to show the lender where the money is coming from, have an attorney draft the agreement detailing the terms of the loan. Specify the amount of money the person is lending you, the interest rate and the date of the transaction. State that you will repay the loan in full upon the sale of your current home.
Inquire about a personal loan. Expect to pay a higher interest rate since it will be an unsecured loan. Also, when you apply for a mortgage to buy a new house, the mortgage lender will include those loan payments with your other debts when qualifying you for a loan, notes MSN Real Estate. The additional debt will increase your debt-to-income ratio -- a factor mortgage lenders consider. Explain that you intend to pay off the loan when you close on the sale of your old home.
Amber Keefer has more than 25 years of experience working in the fields of human services and health care administration. Writing professionally since 1997, she has written articles covering business and finance, health, fitness, parenting and senior living issues for both print and online publications. Keefer holds a B.A. from Bloomsburg University of Pennsylvania and an M.B.A. in health care management from Baker College.