Buying a home can be a very stressful transaction, but what if you need to sell the home you currently live in, to buy the next house? For most current homeowners wanting to buy their next home, it’s a pretty complicated situation. Chicken vs. the Egg, right? Well- in a tight real estate market, many sellers won’t even accept an offer that is contingent to the buyer selling their current home. That’s where Cross Collateralization Mortgage Loans come in handy. Let us expand a little.
What are Cross Collateralization Mortgage Loans?
Much like the Bridge Loan, the Cross-Collateral Loan is designed to provide financing on the future home, 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.
Therefore, if a lender offers you a 10% or higher interest rate you need to run, not walk, away. Our cross collateralization mortgage loans aren’t meant to be a temporary loan like a Bridge Loan. We offer it with a reasonably attractive fixed interest rate and the rate and mortgage payment will float down through a re-amortization process- once the former home is sold.
Why Buy Before Selling?
There are many reasons why a homeowner would prefer to buy before selling. Some of the reasons include:
- Keeping the house clean for showing
- Less pressure to accept a lower than ideal offe
- Ability to buy the home you want before someone else doesAbility to keep the animals and have room for everyone (instead of renting)
- And many more reasons!
Cross Collateralization Mortgage Loans Requirements
- Mortgage lien on the new home as a 1st mortgage, while placing a 2nd mortgage lien on the former home. The underwriters will qualify the buyer for the new mortgage payment while ignoring what will be the former home’s payment.
- The loan requires that between the former home and the new one, that there is a total of 25% equity.
Example 1: Moving up buyer- the current home to be sold is worth $350,000, and only $100,000 is left to pay for an equity position of $250,000. The house to be purchased is worth $500,000 meaning the needed total equity is $212,500.
Example 2: Downsizing buyer- the current home is worth $500,000, and they owe $250,000, so they have $250,000 of equity. They buy a very nice condo for $240,000 requiring a total equity position of $185,000. Once they sell their former home they can pay off the entire mortgage, pay it down to 80% of the home’s appraised value at the time of purchase.
Cross Collateralization Mortgage Loans Pros and Cons
Pros
- You can buy a home without having to sell the current home to close the purchase.
- With enough equity available you can finance closing costs into the loan.
- You’ll get a fixed rate and will re-amortize to a payment that reflects final loan balance, and final float down rate after the former home sells.
- It’s not a temporary loan solution like most Bridge Loans on the market.
- It can be useful in 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 paid.
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 out.
- 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 sell it later down the road.
Gift Funds
Perhaps you have a family member that could gift you the funds necessary to come up with a minimum 3% down payment for a conventional mortgage and the 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. This way there is no rush to find something to buy right away. It can be tough for some pet owners to find a good rental so talk to property managers about rental availability for pets.
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.
