Most home buyers are resistant to selling their current home before they already have another one tied up. This means buying before selling, which carries an element of risk.
One way to approach such a move, if market conditions permit, is to make an offer on the new home that is contingent upon the sale of your current home. This way, you don’t put cash down on the new place until you have your equity out of the home you’re selling.
Although you avoid the risk of owning two homes, you also may have to offer an over-market price to entice the seller into accepting your less-than-certain offer. There is also the risk of losing the house to another buyer who can close without having his or her home sold. Usually sellers who accept a contingent sale offer want a release clause in the contract.
A release clause allows the seller to continue marketing the property until the contingent-sale buyers remove their sale contingency. If the seller accepts another offer in backup position, he notifies the first buyers that they need to remove their sale contingency within the time period specified in the contract (often 72 hours), and show that they are financially able to perform, or they risk losing the property to the backup buyer.
Another drawback of the contingent-sale approach is that it doesn’t work in all markets. In a balanced or slower market where listings are not selling quickly, a contingent sale offer stands a chance of being accepted. But in a seller’s market, where inventory is low, contingent-sale offers are rarely accepted.
In a strong market, you’ll need to step forward with an offer that is not contingent on another property selling. You will also need to provide financial verification that you don’t need to sell in order to generate the cash you need to close.
HOUSE HUNTING TIP: A 30-year fixed-rate mortgage with an interest-only payment option can provide a reasonable option for well-qualified buyers. With this sort of mortgage, you have the option to pay only interest each month for the first 15 years of the loan. After that point, payments are amortized to pay off the loan in full over the remaining life of the loan. This can result in a huge jump in monthly payment. But, you should have no intention of letting this happen.
Let’s say you’re buying a $700,000 home and have enough cash for a 20 percent down payment without selling your home. But, you’ll have to take out a mortgage for $560,000, which is a bigger mortgage than you want.
However, you will have only a $560,000 loan balance until your existing home sells. At that point you take proceeds from the sale of the old place and pay down the mortgage on the new home to a more comfortable amount.
During the interest-only period of the loan, you pay interest only on the remaining loan balance. So, when you pay down the principal, you’ll lower your monthly payment. At the end of the 15-year, interest-only, pay-option period, the loan is amortized over the remaining 15 years. Your payments won’t jump significantly as long as you diligently pay down the principal during the first 15 years. Make sure that the terms of your mortgage permit principal pay-downs at any time without penalty.
Another benefit of this type of interim financing is that it’s long-term financing. You don’t have to worry about paying off a loan earlier than you might be able to if your home takes longer to sell. And, during the time you own two homes, you can make a lower interest-only payment rather than a higher fully amortized payment.
THE CLOSING: This helps with your cash flow.
Dian Hymer is author of “House Hunting, The Take-Along Workbook for Home Buyers” and “Starting Out, The Complete Home Buyer’s Guide,” Chronicle Books.