01 Dec How to buy a house without selling your primary residence (first)
I get this question all the time so I decided to I sit down with Patrick Skovran to discuss bridge loans — what they are and how you can benefit from one. As a Northern California residential lending market leader with Boston Private Mortgage, Patrick is my go-to contact when clients are thinking of buying a house but have all their equity tied up in their current residence. Listen to our conversation above, or read below, as we discuss what kinds of clients are eligible for a bridge loan, how much they cost, and of course, how they work. We’ll also talk about ways to sell a property without having to move out first and the disadvantages/benefits to such an approach. As always, if you have any questions or just want to chat, I’m more than happy to connect!
All My Best,
Transcript from our call:
Ruth Krishnan: I’m here with Patrick Skovran with Boston Private Mortgage, who is my number one lender for bridge loans. What I want to talk about today is a problem that I hear a lot when buyers call me and say, “I really want to buy a house, but all my equity, my down payment, is tied up in the house I own. What do I do?” And so, I thought I’d have Patrick walk us through some of the options available. Hey, Patrick!
Patrick Skovran: Hey, Ruth! Thank you for having me on today. I really appreciate it. And hello to everyone out there.
Yes, we do run into this problem quite a bit. And here at Boston Private, we have a very good solution for it. We look at it more holistically. We want to do two things: 1) We want to help our clients, as you noted, get the equity out of their house before selling it in order to use that for a down payment on a purchase. 2) We then want to help them with the ultimate purchase as well. In this discussion I will use terminology like “departure residence” and “acquisition residence” because if I just say, “home,” too much, people tend to get confused on which one I’m talking about.
Ruth Krishnan: Makes sense! One thing people need to understand is that sometimes you might call your primary bank to ask about these things and the bank will say, “No, we don’t do that,” because there are certain banks that do certain kinds of activities. Depending on a person’s situation, I will refer to different lenders depending on what the needs are. Bridge loans are one of the things your bank specializes in, correct?
Patrick Skovran: Correct. Traditionally, larger banks look at it as: if you have not sold the home you’re going to (your departure residence), you never will. Usually people in this situation run into two challenges. First, they need a down payment and that’s what the bridge loan does for them. Second, they need to be able to buy their new dream home without being penalized because they haven’t sold the other one yet. So, what we do solves both of those problems. We provide our clients with a simple home equity line of credit to use as the “bridge loan,” and that gets the equity out of their departure residence to use for the down payment on their purchase. Then we ask them to agree to sell the departure residence within typically a year. If they sign that agreement with us and a listing agreement with you, we’re comfortable counting that property as if it’s already sold. So, we’re able to qualify them for their maximum purchase price without penalizing them for the unsold departure residence. In a nutshell, that’s our program.
Ruth Krishnan: If I value someone’s home at $2 million and they have a $1 million mortgage, can they use the whole million dollars or how much of that do they have access to?
Patrick Skovran: Anywhere from 70 to 80%. They would get access to $700,000-$800,000 depending on a few different factors. For example, we’d be a little less inclined to go up to 80% on a condo than perhaps a single family residence. But the general rule of thumb is 80%.
Ruth Krishnan: That’s wise. So what happens if they can’t sell their departure residence? What happens if it’s not selling and they already bought another property? Does that ever happen?
Patrick Skovran: That is why we give some reasonable cushion and why we don’t let them finance up to 100%. We give them a year to sell the departure residence, which we feel is pretty generous, but they do need to sell it. They sign an addendum to their note agreeing to sell the departure residence within 12 months.
Ruth Krishnan: Got it. It seems like not everyone will qualify for this product. What’s the ideal client who would qualify and what would exempt someone from being able to have access to this loan?
Patrick Skovran: The one thing we really look for is that they have a little bit, not an overwhelming amount, of liquidity on their own. Obviously, if they had enough liquidity for the down payment, they wouldn’t need to talk to us. But there is going to be a period of time in which they are carrying both properties and we want to make sure they have at least enough liquidity to pay those two bills for about 6-12 months. So we do look for some personal liquidity going into it. Again, not enough that they wouldn’t even need the program, but there does need to be a little bit there to make us all comfortable knowing they can pay both mortgages during the timeframe they’re carrying both properties.
Ruth Krishnan: That makes sense. So I recently took out a HELOC (home equity line of credit) on my home because when COVID happened I worried about what I’d do if I didn’t see a paycheck for a long time. I have a small team and I wanted to have some comfort in terms of having some cash available to take care of them and also to do other things in case the market went down, like buy properties or something like that. If somebody has a HELOC already, could they use the HELOC in the same way as a bridge loan? It sounds like that’s what’s happening, right?
Patrick Skovran: Yes. Our home equity line that we use for a bridge loan is very generic. There is nothing written into it that says you have to use it within a certain amount of time or for any certain purpose. They could change their mind after getting the equity line and then use that money to remodel their existing home or whatever they might desire. I always joke around and say, “They could go to Vegas and put it all on black if they wanted to,” but I don’t recommend that 😉 . There is nothing in that equity line that defines what it has to be used for. It’s written the same way most other equity lines are. The rate is prime plus 1%, which is pretty standard, and they can use it for anything they like.
Ruth Krishnan: What is prime plus 1% for us laymen — what is that number right now?
Patrick Skovran: Prime rate is currently 3.25%. So the equity line today would be 4.25%. It’s interest only and you only pay for it once you use it — just like any other equity line.
Ruth Krishnan: So this is basically having a credit card for a million dollars, right?
Patrick Skovran: Right.
Ruth Krishnan: And unless you spend that credit card, you don’t use that money?
Patrick Skovran: Correct.
Ruth Krishnan: And that money is available for you when you find the home or are ready to purchase, in which case, that’s when the interest starts with whatever the prime is at that time, correct? Does that prime rate float around a lot or a little bit?
Patrick Skovran: I wouldn’t say a lot. It tends to be measured annually. Prime was very low all the way from 2008 until around 2016/17, which is when the Fed started gradually raising it. And as soon as the pandemic came along, they completely went back to where they were before, which is where we are now. I don’t think they’re raising the prime rate in the next year.
Ruth Krishnan: I see. So if I bought a house using that loan, and the prime rate was 4.25%, then my chance of that going up to five, six, or seven over the next 6 months is very low?
Patrick Skovran: I can’t write a guarantee to anyone, but based on what’s happening in the world, I do not see them raising that prime rate anytime in the foreseeable future.
Ruth Krishnan: That’s super helpful to know.
I don’t particularly advocate this, but I want to throw out another option people have if they want to buy a home and sell theirs without putting it on the market. There is something available to us as real estate agents called, “MLS Coming Soon.”
With this option, we would take photos, do all the marketing of a property, and post it to “MLS Coming Soon” as a “buy me now” price instead of listing it with a low pricing strategy. For example, if the price a seller wants is $2 million, that’s the number we would post it to “MLS Coming Soon.” What we’re seeing is that the people looking at the “Coming Soon” are very serious buyers and agents. It’s not a fun process to go through posting to “Coming Soon” because it’s not syndicated to clients and it’s actually very laborious for agents to go through and find these properties for them. There isn’t a ton of information on these “coming soon” properties, so the buyers that are going out, signing COVID forms, putting on masks, and sending their pre-approval letters to come look at these are oftentimes really motivated. This can potentially be a way to get an unstaged house with light cleaning and marketing out there to see if you get your number and then if you get it, close and go buy your other house.
As I said, although I wouldn’t typically advocate this option, this is a conversation that I’m having more of right now in this market, especially with condo buyers who are not sure they can get the price that makes sense for them if we put it on the market.
They’re two different directions and it’s very scary. I talk to sellers about this all the time. They’re like, “Wait! You want me to move out? Where do I go?” A lot of people move into an Airbnb, etc. Patrick, you just went through this yourself because I sold your house to one of my buyers:).
Patrick Skovran: Yes, exactly! You sold my house recently. Thank you.
Ruth Krishnan: Yes, that was really fun! But you and your wife had to move out first, then sell your house, and then buy another one — is that the process you went through?
Patrick Skovran: Yes. We moved out, staged it, and then sold it and have not yet purchased again.
Ruth Krishnan: Got it.
Patrick Skovran: We’re waiting for a more opportune time. But I have kids and I understand why people might not want to do that. COVID created some of the circumstances around that. Many people do not want to move without knowing where they’re moving to. Not to mention that you would have to move twice if you were planning on doing this in rapid succession. If you have to have a school district, if you have to have to be near family or friends, the idea of selling without knowing where you’re going is kind of scary. And we hope that this process (we look at it more as a bridge process than a single loan) helps people do that. Ultimately our goal is to give people some cushion to sell the departure residence without it being regarded as a shackle, holding them down from their next purchase.
Ruth Krishnan: Awesome. This was so helpful. I think lending is definitely at one of its lowest points ever, so that’s a bright spot in our current market. Patrick also does other loans as well, so I’ve included his name and all of his contact information for anybody who is thinking about bridge or any other kind of loans. I’ve worked with him for many years and he’s a fantastic lender. He does a great job and I highly recommend him. If anybody has any other questions about buying or selling, feel free to reach out to me.
Patrick, thank you so much for your time today. I really appreciate it.
Patrick Skovran: Thank you for having me on today. I really appreciate it.
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