Reader Question: Monty, our current home, valued at $700,000+ has no mortgage, and we plan to purchase a replacement home for $650,000 or less. Because we are retired and our income is only $72,000, we do not qualify for a mortgage. We have failed to find a source for a ‘bridge loan.’ We do have about $400,000 in the bank, but half of that is in regular IRA’s. Is there another source for funds and if not must we consider short-term rent to bridge the possible difference in timing between when our house sells and we close on a new one? John S.
Monty’s Answer: Hello, John and thanks for your question. You can find the money you need, but it will be more expensive. The loan you are seeking is a riskier loan than most because your current home is not under a no-contingency contract with a sizeable non-refundable earnest money deposit. For a lender, the fear is if you were to buy a replacement home first and the market price for your current home turns out to be $500,000, it would change your ability to repay the loan if you paid $650,000 for a new one. Without a signed contract, you cannot be sure of the value of your home.
Mortgage lending has changed
The banking industry has changed, but there are still lenders that will finance situations similar to yours. They will want a higher interest rate and more collateral. Because they may be reluctant to make a loan that could place you in the two-homeowner position, you may have to educate them you are aware of the potential risk but you are willing to take it. If all else fails, there are private money lenders that are filling the void regulators’ restrictions on banks have created. If you do a web search for “hard money lenders”, you should have no trouble finding a taker. Prepare yourselves for much higher interest rates.
The short-term rental
You did not ask for this advice but consider not borrowing money in the first place. It appears you are moving from a lower cost area to a higher cost area. While you are reducing your square footage, you don’t get as big a bang for your buck. If this assumption is incorrect, moving from a $700,000 home to a $650,000 home hardly seems worth the trouble. The additional cost of moving twice is a far lower risk than the cost of owning two homes for an indeterminable length of time. Here is an article at www.dearmonty.com about valuing a home you may find helpful.
Avoid the Time Trap
One of real estate’s pitfalls is the effect of emotional considerations on logic and reason. One significant consideration is the psychological pressure that may come into play with the dual payments and upkeep. As time passes and the experience of watching your account balance dwindle increases your desire to sell, any negotiating power you may have had evaporates. It may sound cynical, but 8 months down the road, it would not be unusual for a buyer to feel that a 20 percent discount to an already adjusted price was a favor. Here is an article at www.dearmonty.com about evaluating the risk of owning two homes. There is a true story in the article about a couple that bought the new home before selling the old home.
This guidance is not meant to dissuade, but only to implant the knowledge that allows consideration of all the facts before making a decision.
Multiple opinions of value
Lastly, it may be helpful to get several opinions of value from good real estate agents as to their opinions of the best price you can expect and the lowest price you should expect when you sell your home. Unfortunately, many home sellers accept one opinion, according to the National Association of Realtors. It would also be helpful in seeking a loan as it demonstrates to the potential lender that you have considered all the risks. There are two articles at www.dearmonty.com that may be helpful; Choosing your real estate agent and Managing the process of buying and selling real estate.
I hope this information is helpful, John. Ask if you have further questions.