By, Lucas Bucl, a Certified Financial Planner professional and a shareholder at Aspyre Wealth Partners.
Financial Gap Trap Between Buying and Selling a House
In today’s competitive real estate market, homes often sell quickly and sellers frequently dictate closing dates and other key terms. This creates a challenging situation for buyers who are simultaneously selling their current home and needing to access their home equity for a down payment on their new property.
This timing mismatch can cause significant stress, add complexity to transactions and sometimes even prevent qualified buyers from making offers.
Fortunately, several financing solutions exist for buyers who either don’t have the cash readily available for a down payment or prefer not to deplete their personal reserves. Understanding these options can empower home buyers to navigate the market with confidence.
Home equity line of credit (HELOC)
Given the substantial appreciation in housing prices over recent years, many homeowners have built significant equity in their properties. A HELOC allows owners to tap into this equity while still owning the home.
Timing is critical when considering a HELOC. Homeowners must secure their HELOC before listing their property for sale, as most lenders won’t approve a new HELOC once a home is on the market.
A HELOC typically offers competitive interest rates since it’s secured by your property. Funds can be drawn as needed and you’ll only pay interest on the amount used. The loan would be paid off when the house is sold.
Pledged asset line of credit
For homebuyers with substantial investment portfolios, pledging securities as collateral can be an attractive option. This approach allows buyers to access cash without selling investments, which would potentially trigger capital gains taxes.
While this option provides liquidity without disrupting your investment strategy, borrowers should be aware of the capital call risk. If your portfolio significantly decreases in value, the lender may require additional collateral to be deposited into the account.
Bridge loans from traditional lenders
Bridge loans, sometimes called swing loans or gap loans, are short-term financing options specifically designed to bridge the gap between buying a new home and selling an existing one. They are secured against your existing home and paid off when this home sells.
I find that many large national banks are less inclined to offer bridge loans, but many community banks and credit unions still offer this type of financing. These loans are typically secured against your current home and have a shorter term, such as six months to a year.
While interest rates for bridge loans are generally higher than conventional mortgages, they provide crucial short-term liquidity when timing is essential.
Family financing options
For some buyers, family assistance can provide flexible solutions:
Family loans: A formal loan from family members can offer favorable terms compared to institutional financing. These arrangements should be properly documented with clear repayment terms to avoid misunderstandings and potential tax complications. A minimum interest rate should be charged to avoid the IRS treating the loan as a gift.
Family gifts: Some buyers may receive gifts from parents or other family members to help with down payments. These gifts are allowed. However, lenders will want the gift to be documented for mortgage approval, including a gift letter stating the funds don’t need to be repaid.
Approaches to avoid
Retirement Account Withdrawals: Early withdrawals from retirement accounts often trigger taxes and penalties. Even borrowing from a 401(k) can be risky, as these loans typically become due immediately if you change employers.
Your retirement savings should be viewed as a last resort for short-term housing needs. The long-term cost to your retirement security often outweighs the short-term benefit.
The key to successfully navigating simultaneous buy-sell real estate transactions is advance planning. Exploring these options well before putting your current home on the market or making an offer on a new property is essential.
Understanding your financing options early in the process gives you confidence when making important decisions about timing. It also strengthens your position when negotiating with sellers, as you can demonstrate financial readiness.
Read the full article in The Kansas City Star.