There are many would be home buyers and home sellers that are struggling with the concept of how to buy their next home, simply because they don’t know, what they don’t know.
Let’s look at a few options:
- Sell your existing home off-market to an investor
- Buy your next home using a Bridge Loan (Short term financing for your down payment) | Home Swap Program
- Keep your current home as a rental
- Use a line of credit for either the down payment/purchase funds
- Purchase a home with seller financing
- Assume the existing clients FHA/VA Mortgage
- Or... Seller your home traditionally, find a rental and purchase in your time
Off Market Investors: If you have owned a home in Southern California for more than 5 years, you probably have experienced massive appreciation. Many people are choosing the sell their home off-market for a myriad of reasons. It’s convenient, private, easy, and pretty much guaranteed. Why wouldn’t you sell your home off market? Well... it’s not for everyone. Many people will happily exchanges their privacy and convenience for money. Many others wont! In most Orange County cities, right now, the average off market home will sell for anywhere between 68%-72% of fair market value (or ARV After Repair Value if your home is a fixer.) The benefits are there... and yet so is the cost!
Bridge Loans: A bridge loan is a short-term loan that helps people or businesses bridge the financial gap between buying something and selling something else. Bridge loans are also known as gap loans, hard money loans, or swing loans. In real estate, bridge loans are often used to help homeowners buy new properties while waiting for their current homes to sell. For example, a bridge loan can help with the down payment on a new home, or it can cover both mortgage payments while the current home is being sold. The average duration for a bridge loan would be between 6-12 months, which typically comes with an above market interest rate, and hefty fees as there is a 1-2.5% origination fee that is tied to the amount borrowed.
Keeping your current home as a Rental | Sell your existing home first and then use those funds for your down payment: These 2 tie in to each other quite well. Many sellers are sitting on a ton of equity, and there may be an option to pull money out of their current home for a down payment on their next home. If their first trust deed is below 5% which is about 75% of all homes in the nation, than it may make sense to leave that where it’s at. You can tap into “some” of the equity by pulling out a HELOC (Home Equity line of Credit). This would be in the form of a 2nd mortgage, and most lenders will allow you to borrow up to 90% (sometimes more, of your home’s appraised value, minus what you owe on your mortgage). Qualifications depend on quite a few things including your credit score, your debt-to-income ratio, and your employment history. If you were to consider a HELOC, I would suggest you speak to your tax professional, and financial adviser to make sure this is a good vehicle for you and your goals. Once you have those funds in place, you can purchase your new home, and rent out your current home to offset your monthly obligations.
Use a Line of Credit / Hard Money Loan or the Knock Home Swap Program: This may surprise you... there are many lending companies that are out there that will provide you with a short term line of credit. During the “Cash Craze” a few years back when investors where competing with buyers obtaining financing, it turned out that many of the investor letters were straight up lines of credit or hard money loans. These investors developed a relationship with their bankers and because of their relationship, they were in what I call the Trust Business. They earned the trust of the bank to borrow money with minimal collateral as they were able to prove their credit worthiness over time. These lines of credit were not cheap! Many of them came with up front points, they were interest only, higher rates, and they typically had short term full payment requirements. An example would be a $1,000,000 line of credit would be used for a home that was $850,000. The investor would then use that same line to carry the cost of the project, and pay for the remodel. When the investor sold that property, the line would be paid in full, and the investor would be left with the profit from the sale. Last in this category would be a program such as the Knock Home Swap program, now powered by HomePointe. This unique program allows you to purchase a new property, with a new mortgage, and the current mortgage does not count against your qualifications. You have 120 days to sell your current home after closing escrow on your new property, and they will even loan you money to make improvements to your existing home... some fresh paint, flooring, you get the picture. When your older or existing home closes escrow, you then repay them a 2.4% servicing fee, which is based off the sales price of the new home.
Purchasing a home with seller financing: While it’s not that common today, it took place all the time back in the early 1990’s and prior. There were quite a few AITD’s Land Contract’s, Wraps, etc. In this situation, you may come into contact with a seller is sitting on a ton of equity, and rather than sell the property traditionally, they would like to receive residual income. The seller becomes the bank/lender and they determine the buyer’s credit worthiness. From there they agree on the length of the note, any prepayment penalty, address the kind of payment the buyer was responsible for such as: (Interest only, Principle and interest) etc., and then the maturity date, or when the balance of the funds or balloon payment would come due. In many cases, the parties may agree to extend the terms out, shorten the terms, or if the buyer is not performing or making payments, foreclose on his loan, take back possession and start the process all over again. This can still be done in the right situation with the right parties, however it is very far and few between.
Assume the current seller’s FHA/VA mortgage. You may or may not know, that many if not ALL of these mortgages have an assumption clause... and most of these would be very favorable options for a buyer in this market. At the same time... these are not very common as most buyers in this current market can’t afford to close the gap between the seller’s current loan amount and the purchase price. If they can, than it may be a great fit! The same thing goes with the VA loan; however the seller needs to find comfort knowing that their VA eligibility stays with that note and with that property. That means, they can’t use their VA again until that loan is paid in full. The other issue with a VA assumption is... if the new buyer were to go into foreclosure, the veteran that left their VA on that property would most likely lose their VA eligibility moving forward, or they would have to cure the loss to the VA in order to get that back. That is a tough ask in a seller’s market. In a buyer’s market... we may just see the return of VA Assumptions. The reason that this is a good option on purchasing prior to selling is it’s almost always easier to qualify for the assumption. * Most of the time there is a lower principle amount, and a lower interest rate.
Now... If you or someone you know are in the market to sell your current home and purchase your next home here in Orange County, let’s connect and go through your options. I’d love to co-pilot this journey with you.
Until then... take and be well.