Buying a home is already a stressful process, but it becomes even more complex when you need to sell your current home first. For many homeowners looking to move, balancing both buying and selling at the same time can feel overwhelming. Chicken vs. the Egg, right? Well- in a tight real estate market, many sellers won’t even accept an offer that’s contingent on the buyer selling their current home. That’s where cross-collateralization mortgage loans come in handy.
What are Cross Collateralization Mortgage Loans?
Much like the Bridge Loan, the Cross-Collateral Loan is designed to provide financing for future homes while also collateralizing what will be the former home for the buyer. However, most Bridge Loans are designed to be short-term loans and can come with relatively high interest rates.
If a lender presents you with an interest rate of 10% or higher, it’s a clear sign to walk away- fast. Unlike bridge loans, our cross-collateralization mortgage loans are designed as a long-term solution with a competitive fixed interest rate. Plus, once your previous home sells, the rate and mortgage payment adjust downward through a re-amortization process, making it a smarter and more sustainable financing option.
Why Buy Before Selling?
There are many reasons why a homeowner would prefer to buy their new home before selling their old one. Some of the reasons include:
- Keeping the house clean for real estate showings
- Less pressure to accept lower-than-ideal offers
- The ability to buy the home you want before someone else does
- The freedom to keep your pets and have enough space for everyone (something renting often can’t provide)
- And more
Cross-Collateralization Mortgage Loan Requirements
While this type of loan allows homeowners to buy a new home before selling their current one, there are specific requirements to qualify. This loan places a first mortgage lien on the new home while securing a second mortgage lien on the existing home.
One of the key benefits is that underwriters only consider the new home’s mortgage payment when determining eligibility, meaning they don’t factor in the existing home’s payment. However, to qualify, the borrower must have at least 25% total equity across both properties (the current home and the new one).
This structure provides flexibility for homeowners transitioning to a new home while ensuring they meet important loan requirements.
Example 1: Move-Up Buyer
A homeowner is looking to purchase a larger home while selling their current one.
-
Current Home Value: $350,000
-
Remaining Mortgage Balance: $100,000
-
Equity in Current Home: $250,000 ($350,000 – $100,000)
-
New Home Purchase Price: $500,000
-
Required Total Equity (25% of both properties): $212,500
Since the homeowner’s total equity exceeds the required amount, they would meet the equity requirement for a cross-collateralization mortgage loan.
Example 2: Downsizing Buyer
A homeowner is looking to downsize by selling their current home and purchasing a condo.
-
Current Home Value: $500,000
-
Remaining Mortgage Balance: $250,000
-
Equity in Current Home: $250,000 ($500,000 – $250,000)
-
New Condo Purchase Price: $240,000
-
Required Total Equity (25% of both properties): $185,000
Since their total equity exceeds the required amount, they qualify for a cross-collateralization mortgage loan. Once they sell their former home, they can either pay off the mortgage entirely or reduce it to 80% of the condo’s appraised value at the time of purchase. This gives them financial flexibility while securing their new home.
Cross Collateralization Mortgage Loans Pros and Cons
Pros
- You can buy a home without selling the current one to close the purchase.
- You can finance closing costs into the loan when you have enough equity available.
- After the former home sells, you’ll get a fixed rate and will re-amortize to a payment that reflects the final loan balance and final float-down rate.
- It’s not a temporary loan solution like most Bridge Loans on the market.
- It can be useful when converting the former residence into a rental after buying a new home.
- It’s typically less expensive than traditional Bridge Loans in rate and fees.
Cons
- You may pay a slightly higher rate and higher fees than a standard conventional mortgage.
- You may have to pay two mortgages until the former home is sold or rented.
- It often requires three months of payments for each home in savings; some exceptions can apply.
Alternatives to the Cross Collateralization Mortgage Loans
Bridge Loan
The Bridge Loan may require a lower equity position but can be more expensive and have riskier features.
HELOC
Get a home equity line of credit to borrow the funds you need to cover the down payment and closing costs. Consider whether you and your lender can underwrite a standard purchase loan and cover two mortgage payments, or perhaps consider renting your former residence and selling it later down the road.
Gift Funds
Perhaps you have a family member who could gift you the funds necessary to gift you the minimum 3% down payment for a conventional mortgage and closing costs.
Sell and Rent
Sometimes, it’s less complicated to sell the home and move into a month-to-month rental until you find the perfect home. It can be tough for some pet owners to find a good rental, so talk to property managers about rental availability for pets. In this situtation, there is no rush to find something to buy right away.
If you’re selling your home to buy a new one, contact our office today. We would love to see what option would best for you.
