Sale contingencies can be tough in this market
Buying a home in today’s competitive housing market is already a challenge. And having to sell a house prior to buying your next one can make things more complicated.
In a different, less competitive housing market, it’s common to submit an offer that’s contingent on the sale of your current home. But contingent offers in a hot real estate market are tough. Sellers might hesitate to accept contingent offers, as it could potentially derail the sale if the buyer can’t sell on time.
As a buyer, how can you avoid the sale contingency, make your offer more attractive, and still protect yourself financially? Here’s what you should know.
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What is a home sale contingency?
A home sale contingency clause can be included in a purchase contract. It states that for a home sale to go through, the buyer’s existing house must sell prior to a certain date — typically by the closing date of the new purchase.
There’s more than one reason that buyers may need to sell their existing home prior to buying another home.
- The equity from your current home may be needed for the down payment on your new home
- You may not be able to afford two mortgage payments at once
- You may not qualify to purchase a new home with the mortgage payment
Selling your current home prior to buying a new one is ideal for both the buyer and seller. However, the timing and financing don’t always happen in the necessary order for this to happen. And that means sellers often aren’t keen on accepting offers that include a home sale contingency.
Even though the seller retains the right to cancel the contract if the buyer’s home is not sold within the specified number of days, the seller may still end up being forced to pass up another offer while waiting for the outcome of the contingency.
And, with today’s market being so competitive, sellers often have the option of accepting a different offer that doesn’t include a home sale contingency. As a result, many buyers are looking for ways to buy a home without this clause.
Strategies for buying a home while selling a home
One common reason for sale contingencies is that buyers need to use the equity in their current home to purchase their next home. But there are a few ways you can come up with a down payment without selling your existing home first. Here are three strategies to consider.
1. Low-down payment loans
A common myth when buying a home is that you need to put 20% down. But in fact, many home loan programs allow as little as 3% or even zero down. With one of these low-down-payment loans, you may be able to make the down payment on your next home without first selling your current home.
If you qualify, there are several low-down-payment options:
- Conventional loans backed by Freddie Mac and Fannie Mae offer 3% down to qualified buyers
- FHA-backed loans start at just 3.5% down
- Military service members can apply for VA loans, which require zero down
- If you’re buying in a rural area, you may qualify for a zero-down loan backed by the USDA
Keep in mind that most buyers who put less than 20% down end up paying private mortgage insurance (PMI), which might not sound ideal as a repeat home buyer. But if you plan to buy now and sell your existing home soon after, you could use the proceeds later on to do a cash-in refinance and remove the PMI on your new home. Think of one of these loans as a stopgap solution rather than a permanent mortgage.
2. Home equity loans
Home equity loans and home equity lines of credit (HELOCs) can be a great way to access and use the equity you’ve built up in your current home. Banks will typically loan up to 80% of your home’s equity, minus your existing mortgage. The money you cash out can be used for any purpose, including making the down payment on your next home.
Just keep in mind that this creates a new lien on your existing home — one that will have to be paid off when you do eventually sell it. A HELOC or home equity loan creates a second mortgage payment, too, which will be factored into your debt-to-income ratio when applying for your next mortgage loan.
3. Bridge loans
Bridge loans are temporary loans that bridge the gap between the sale price of a new home and a buyer’s new mortgage. Bridge loans are secured by the buyer’s existing home and the funds are used as a down payment for their new home.
Unlike mortgages, home equity loans, or HELOCs, bridge loans are designed to be a short-term financing option that simply helps you get into your next property. These may provide funds faster than a mortgage would, but interest rates tend to be higher.
iBuyers can help you buy a home without a sale contingency
In recent years, iBuyer companies such as Opendoor and Offerpad have emerged to help buyers who have to sell a home prior to buying.
An iBuyer is a company that uses technology to make an offer on your home instantly. iBuyers are offering, in many cases, a simpler and more convenient alternative to a traditional home sale.
iBuyers operate in different ways. The fundamental concept is that a company estimates the value of your home and makes an offer. If you accept, they take on the burden of owning, marketing, and reselling the home. Depending on the service you choose, the benefit is the certainty of an all-cash offer and more control over when you sell.
Real estate companies like Orchard, Ribbon, Knock, Homeward, and Homelight have also appeared in recent years to assist buyers in making non-contingent offers.
The concept for these companies is straightforward. They use their cash to make a contingency-free offer and reserve a home for you. You can move in right away and you won’t pay your mortgage until your old home sells. As you settle into your new home, they will handle your old home listing and find a buyer. Once your home sells, they will transfer your new house into your name.
The downside is that iBuyer fees might be higher than traditional mortgage and real estate fees. So look at each offer carefully and work with lending experts to determine which option makes the most sense for you.
Don’t let a sale contingency keep you from buying your next house
When it comes to buying a home, the highest offer isn’t always the best. A great offer that falls through due to the buyer not being able to sell their home first isn’t good for either party. And that’s why sale contingencies are often a concern for sellers.
Understanding your options for making a contingency-free offer will help you buy your dream home in today’s hot real estate market. Talk to a real estate expert about your options.