Financing Your Next Home Before You Sell: 4 Loan Options Explained

If you need to buy a new home before selling your current one, you have several financing strategies to avoid a sale contingency. The most common solutions include using a home equity loan, opting for a low-down-payment loan, structuring an 80-10-10 piggyback mortgage, or obtaining a bridge loan. The best choice depends on your equity, credit score, and the timing of your sale.

Navigating the simultaneous purchase and sale of a home is a common challenge. According to industry data, a significant majority of home buyers are repeat purchasers who often face this exact scenario. Without substantial savings, covering two mortgages and a new down payment can be difficult. This article outlines four practical loan options to help you bridge the financial gap.

What Is a Home Equity Loan or HELOC?

If you have significant equity—the portion of your home you truly own, calculated as its market value minus your remaining mortgage balance—you can borrow against it. A Home Equity Loan provides a lump sum, while a Home Equity Line of Credit (HELOC) works like a credit card with a revolving credit line. A home equity loan typically has a fixed interest rate, whereas a HELOC often has a variable rate.

This strategy allows you to access cash for a down payment on your new home. However, you must act early. Lenders for your new mortgage will want to see that these funds have been seasoned in your bank account for several months.

Are Low-Down-Payment Loans a Viable Option?

If your credit is strong, buying your new home with a low-down-payment loan before listing your old one can provide flexibility. The lender will include your current mortgage payment in your debt-to-income ratio (DTI), which is your total monthly debt payments divided by your gross monthly income. Most lenders require a DTI below 43%.

Several government-backed programs offer low down payments:

• Conventional Loans: As low as 3% down for qualified buyers.
• FHA Loans: Require a minimum 3.5% down payment.
• VA Loans: For eligible service members, offering 0% down.
• USDA Loans: 0% down for properties in designated rural areas.

How Does an 80-10-10 Piggyback Mortgage Work?

An 80-10-10 piggyback mortgage involves two loans. The first mortgage covers 80% of the new home’s price, and a simultaneous second mortgage (like a home equity loan) covers 10%. You then make a 10% down payment from your own funds.

The primary advantage of this structure is avoiding private mortgage insurance (PMI), which is typically required on conventional loans with a down payment of less than 20%. After you sell your previous home, you can use the proceeds to pay off the second mortgage, leaving you with a single, larger first mortgage.

When Should You Consider a Bridge Loan?

A bridge loan is a short-term loan that uses the equity in your current home as collateral to fund the down payment on your new home. It is designed to "bridge" the financial gap between the two transactions. While convenient, bridge loans often have higher fees than home equity loans.

Payment structures can vary; some lenders may allow you to skip initial payments, but interest will accrue and be due when the loan is repaid from the sale of your old home. Lenders may also be more flexible with DTI ratios for borrowers using bridge loans, especially if the new mortgage is run through an automated underwriting system.

To successfully manage buying before selling:

• Start the process early, especially if using a home equity product, to meet fund seasoning requirements.
• Get your DTI in check by understanding how lenders will view your existing mortgage.
• Compare all fees associated with bridge loans and home equity products.
• Consult with a mortgage lender to assess which option best fits your financial profile and local market conditions.