Sales contingent offers, in which a prospective buyer's bid to purchase a home carries the precondition of selling their current home, have never been attractive to sellers and are generally given little consideration. In a low inventory market where multiple offers are common, few sellers see any benefit in linking the fate of their transaction to the sale of another property. Homeowners looking to buy a new residence have a few strategies they can employ to work around this issue. When lacking sufficient income to qualify with payments on both properties, borrowers can sometimes use a rental income off-set on their current home. (See my blog on using rental income from a departing home: Blog link). But many buyers need the equity from their current home for down payment funds on their future residence. An equity line of credit can sometimes work, but these are hard to come by, especially if the current home has been listed for sale. Another option that allows the borrower to tap into the equity of their current home or another asset is cross-collateralization or bridge financing.
Cross-collateralization or bridge financing can serve as an important tool for borrowers looking to purchase a new home prior to finalizing the sale of their existing one. There are varying permutations of these loans but, in general, they secure the equity position of both properties to facilitate the purchase of the new one. Traditional bridge financing involves a separate, short term loan and cross-collateralization combines both properties under one promissory note. Although these loans were never common bank offerings and are now more difficult to find, there are a few reliable sources. Here is a scenario based on one good cross-collateralized product:
- The buyer's current home is worth $1,000,000 and has existing liens of $400,000, with $600,000 equity.
- The new property is valued at $1,000,000.
- The lender will combine both properties for a total valuation of $2,000,000 and then lend to 70% for total credit of $1,400,000.
- After subtracting $400,000 to satisfy the lien on the existing home, the borrower is left with $1,000,000 to cover the full purchase price of the new home (less closing costs) with no requirement for down payment money.
Requirements and loan terms of this product
- 680 FICO scores are acceptable.
- Both properties are joined by one promissory note.
- A current residence or an investment property may be used as collateral.
- Projected rental income on the departing home can be used toward qualifying income.
- Both properties will need to be appraised.
- Borrower pays fees on just one loan and one escrow, but title insurance on both properties.
- Loans are Adjustable Rate Mortgages (ARMs) with fixed terms of 3, 5, or 7 years.
*An Interest Only option is available. So, in the scenario above, if selling the first home, the loan could be reduced from $1,000,000 to $400,000 and mortgage payments would be reduced proportionately.*$3,000,000 financing is available to 70% of the value on both properties and up to $5,000,000 in financing is available to 65%.