Are you worried you can’t buy a house without selling your house first? Are you afraid you will be stuck with two mortgages and accumulate debt like a teenager with their first credit card? This dilemma happens to many homeowners, but there are options to sell your house before buying a new house. Let’s take a look at your buy-before-you-sell options.
- Make a contingency-free offer to stand out
- Avoid paying for two mortgages
Your real estate agent and mortgage lender can provide financing options to buy a new home before selling your existing home. You’ll learn about the advantages and disadvantages of each option, like the difference between using a bridge loan and an iBuyer.
A bridge loan will “bridge the gap” when buying and selling a home in tandem. Bridge loans offer short-term financing to provide immediate cash flow so you can purchase a house without selling your existing home first. The main two options for bridge loans include holding two loans or rolling both mortgages into one.
When you get a bridge loan through a mortgage lender, you can borrow the difference between your existing loan balance and as much as 80% of your home’s value. In this case, your current mortgage balance stays the same, and a second mortgage loan is used for the down payment on a second home until you sell your house.
Another bridge loan option is to roll both mortgages into one. Your mortgage lender can provide you with one large loan equivalent to up to 80% of your home’s value. Use this loan to pay off the balance of your first mortgage and apply the rest toward the down payment on the home you’re purchasing.
Another benefit of using a bridge loan is making a contingency-free offer on a house. In other words, buying another house isn’t contingent on closing on the sale of your current home. Home sellers tend to steer clear of home offers where there is a contingency, especially if there are other offers without contingencies.
- Option 1: two home loans
- Option 2: two mortgages rolled into one
- Contingency-free offer
- Short-term loan
Disadvantages to using a bridge loan include higher interest rates than a conventional home loan. If a conventional mortgage has a 3% interest rate, a bridge loan may have a 5% interest rate (varies). Mortgage lenders charge more interest because they want to make it worth their while to loan you money. Fortunately, bridge loans are short-term. Other factors you need to consider when using a bridge loan include the following:
- Pay closing costs and fees
- Higher interest rates
- Pay origination fee
According to a study by Zavvie, home sellers took advantage of bridge loans 5x more often than using iBuyers.
- If you need to move quickly (ex. Job transfer), a bridge loan is a great option to get you into a new house fast
- Service fees for bridge programs are 1.25-3% lower than iBuyer fees (~5-8%)
- Bridge loans are especially beneficial when there is low housing inventory
- Bridge loans may help you afford a more expensive home than what iBuyers offer
- Use a bridge loan to buy a house and profit as much as 72% more than using an iBuyer
iBuyer services fees are much higher than bridge loan fees, sometimes double the amount. When an iBuyer purchases your home, they make repairs and renovations before selling it. The fee you end up paying for these repairs can be 3.5% or more ($1,000’s). Homeowners who need to sell quickly may not be bothered by the amount of money they’re losing because of these repairs and charges. A homeowner who wants to make the most significant possible profit on the sale of their home may want to look at other ways to sell their home beside an iBuyer. Consider this and the following when considering an iBuyer:
- Receive a lower value for your house than if you sold it through a real estate agent
- Pay extra for fees associated with home repairs
- Sell your house at wholesale, not retail price
- Receive an all-cash instant offer
- Sell your house quickly
When an iBuyer buys your home, they buy it at a reduced price and then sell it for more. For example, the iBuyer Opendoor lists your home for 17% more than what they paid you, resulting in a profit for them and a significant financial loss for you. I’m talking $30,000 - $85,000+ that you could lose if selling to an iBuyer! If you had listed your home with a real estate agent, you could keep that money. If you’re considering working with an iBuyer, talk to a real estate agent to see if a traditional sale would favor you.
When you need to sell your home in order to buy another home, ask yourself where you’ll get the highest price for your house in the shortest amount of time. Ask your real estate agent or lender to use a bridge loan calculator to estimate what you’ll ultimately pay for the home loan, or find a calculator online. Your real estate agent can outline the difference between a bridge loan and an iBuyer offer on your home to ensure whichever option you choose works best for your home-selling situation. Some real estate agents work directly with iBuyers to find you the best possible scenario when selling your house. Keep an open mind when you need to sell your house after you’ve found another house you want to buy. Your decision to go with a traditional home sale or an iBuyer can greatly affect your bottom line and timeline.
For more information on selling your home,
take a look at Reazo's comprehensive home sellers guide: