Financing is the First Place to Start

Financing is the First Place to Start

Whether you are buying your first house, your step-up house, or downsizing to a smaller home, the first question you need to answer is how you will finance the purchase. You can use cash, financing through a bank, or proceeds from the sale of your current home to cover the cost of your new home. Each person’s situation is unique and may take a combination of options to achieve your overall goal of finding your next home. Let’s look at these options more in-depth:

Cash Offers

Cash offers are pretty straight forward. Since there is no 3rd party lending involved, you won’t need an appraisal and you won’t need to go through a bank’s underwriting requirements. As a result, cash offers are typically very quick to close, if desired.

Traditional Financing

This is the most common way to obtain the funds to purchase a home. Traditional financing entails working with a lender of your choosing to take out a 30-year or 15-year mortgage to purchase your home. Your lender will look at your credit score, debt to income ratio, and funds for a downpayment and then give you a pre-approval letter.

Proceeds From Equity

Using the proceeds from equity to cover the cost of your next home is a common desire for someone looking to downsize. I’m going to highlight a couple options that may work for you here.

The first one is getting a bridge loan through a lender. This is where they loan you money against the equity in your current home in order to cover the cost of your next home. There are some major pros to this approach, such as allowing you to have a few weeks in between the closing of your purchase and the closing of the sale of your current home. This will give you plenty of time to move and get through the many years of items you may have stored away.

The other benefit to using the bridge loan is that you keep some major contingencies off of your purchase agreement when you are writing offers. Since the bank is converting your equity into cash, you essentially have a cash offer and don’t need to place a sale contingency on your offer. A sale contingency is when you have to sell your current home for the offer to move forward with the purchase of your next home. These carry risk to the seller of the home you are trying to obtain and can be looked at negatively in a competitive market like we are experiencing today.

The main cons to a bridge loan are that they cost you money and you need to be able to qualify for that second loan if your current home isn’t 100% paid off. The bank is going to charge you underwriting fees, processing fees and interest on the loaned money. Even though it’s a short period of time, it can easily cost you $1,500 to $2,000 depending on the amount of money borrowed.

The second way to go about using the proceeds for the equity in your home is to place a sale contingency on the contract stating your need to sell your current home first and also time up the closings to be on the same day. As mentioned previously, this will make your offer less competitive, but may be completely acceptable in certain situations such as buying new construction in today’s market.

The other negative aspect of timing up both closings on the same day is that you will need to be out of your current house prior to closing in the morning, for example, and won’t be able to get into your next home until you close in the afternoon.

Every Situation is Unique

I hope this information helped clarify the various ways to finance a home purchase. Each person’s situation is unique to them and there isn’t a single best course of action that works for everyone. This is why I highly encourage a relationship with your lender along with your realtor to help you navigate meeting your goals.

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