We here in the San Francisco Bay Area — and from what I’m gathering, in many other areas of the country as well — have dealt firsthand with the virtual impossibility of the “contingent offer.” That is, when a buyer must sell his current home first in order to close on the new one, and when the purchase offer on the new home is specifically written to alert the seller that the two transactions are interdependent, it is said to be “contingent.” Another, less subtle but more humorous, way to describe contingent offers might be, “dead on arrival.” This is because the seller knows that if the buyer of the new home cannot sell his existing home (in time or at all), the new deal would likely be off because our buyer would either not have the down payment, the qualifying income, or both. It stands to reason that in a high-demand seller’s market, few of those looking to quickly sell their property at top dollar would be inclined to complicate their sale in this manner.
But are there any ways and any programs that a buyer in this situation can use to get out from underneath having to make a contingent sale offer? Indeed there are.
#1: Qualify “All In”
As implied, this buyer can produce a down payment for the new home AND can support, from a debt-to-income (DTI) perspective, the housing payments on both homes. As you might suspect, this would be a stretch for many buyers so it is not especially common. But where possible, this might be the simplest and best way to move forward. If the departure home later sells, the borrower can take some/all of the proceeds and either refinance or recast the loan on the new property.
#2: Use a Specialized “Departing Residence” Program
You might think that the homeowner who is looking to buy could just tell his mortgage lender that he plans to rent out the current home. In lending parlance, this would be considered a “departure property,” and it brings with it approval tests that can introduce a lot of risk and stress into the transaction. To counter this we can sometimes use a program that allows a buyer to use proposed rent on the departure home but DOES NOT require a rental agreement in place, a security deposit from the renter AND, often, an equity test on the home to be rented (usually at least 30% equity). Our departing residence program will instead use an appraiser’s rental survey on the original home. If the property could produce $2000 per month rent, for example, we will allow 75% of this amount ($1500) to offset the borrower’s debt service on that property. A departing residence program still requires that the buyer can come up with the down payment for the new home, so in short, departing residence programs work where the buyer has the down payment, but not the income, to support the two homes. If even temporarily.
#3: Use a “Cross Collateralization” Program
As we just covered, where there is a down payment but not the income, the rental survey piece can be a lifesaver. But what if we have the opposite? We have the income but not the down payment? Sometimes we find that the equity in the departure property would make a great down payment but the problem is that it’s “landlocked” until the sale of that home. With a cross-collateralization program we will “monetize” that equity by having our mortgage “cross” both homes, thereby tapping the down payment before the sale. When our borrower does eventually sell the current home, a “release amount” will be applied to the full balance of the mortgage, thus essentially recasting the note and making it a permanent loan on the new home. So for cases where the buyer has the income, but not the down payment, a cross-collateralized loan may do the trick.
#4: Use a Bridge Loan
Bridge financing may seem identical to a cross-collateral loan, but it is not. And bridge loans come in a few varieties. We offer one that I cover specifically here in THIS blog. The program requires “ability to repay” and is in keeping with conventional mortgage guidelines and thus qualification is more stringent. And then there are private money bridge loans. A private money bridge is used in cases where the buyer has neither the income nor assets to purchase the new home, but does have a lot of equity tied up in the existing home. Private money bridge financing falls outside of many of the mortgage regulations and therefore can be closed very quickly and with very little qualifying documentation.
I am convinced that if more Realtors and buyers understood these options, and became even conversant in their characteristics, it would at least have a subtle positive impact on the scarce inventory scourge that has dictated the pace of our market over the last few years. But if you find yourself confronting the common situation where you must buy before selling your current home, get in touch and we’ll see if any of the four approaches here prove the best fit. If so, you might be closer to success than you have been led to believe.
Robert J. Spinosa
Vice President of Mortgage Lending
Cell/Text: 415-367-5959 Fax: 415-366-1590
Marin Office: 324 Sir Francis Drake Blvd., San Anselmo, CA 94960
Berkeley Office: 1400 Shattuck Ave., Suite 1, Berkeley, CA 94709
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