I’m noticing more contingent offers lately. This is when someone makes an offer to purchase their next home and the offer is contingent on the successful closing of their current residence. Contingent transactions may occur for several reasons:
- The net proceeds (equity) of the former house may be needed for the down payment on the new home.
- The buyer may not qualify (or want) to risk having two mortgage payments while waiting for the former house to sell and close.
- The equity in the former house may not be enough to facilitate a bridge loan.
In fact, I just had an excellent question from one of my clients that is worthy of sharing with you:
“Since our purchase is contingent on sale of existing property, when does the loan actually close and what are our liabilities in the event our home fails to sell? The only other time I bought a house there wasn’t the issue of selling one so it never came up for me.”
With this scenario, without a bridge loan to tap into the equity of the former home, the loan on the new home will not be able to close until the old home is closed. This is because the proceeds of the old home are needed for the down payment on the new home. This typically takes place the same day, however, I recommend having the closing take place the day after the day after the old home closes, if possible, to allow for transfer of funds. This is referred to as a simultaneous closing.
A bridge loan allows you to close on your new home quicker, without waiting for the old property to sell and close. Knowing your closing date, also enables you to secure your interest rate by being able to lock your loan. A home equity loan on the current residence is also a possibility. However, the advantage with the bridge loan is that there are no monthly payments due (interest is deferred until the home is sold).
Check with your Real Estate Agent to see what your liabilities may be if your home does not sell. There should be an addendum to the purchase and sale agreement addressing what happens if your home does not sell. The purchase and sale agreement may also address when the closing date will be on your new home (for example, “x” days after the closing of your old home) and what happens if someone else makes an offer on the home you’re buying “non-contingent” (without having to sell their home to close on the new home)…also referred to as being “bumped”.
People buy homes contingent all the time. It’s important to have an understanding of the process, what your options are and to have a game plan in the event of a “bump” so you can be ready with your ducks in a row!
UPDATE 2012: We currently do not have bridge loans available as of 4/20/2012.
If you would like me to review your current scenario to help you be preapproved for your home purchase anywhere in Washington state, please contact me.