Published: April 17th, 2024 • Last Updated: September 20th, 2024
Author: Brent Rowe on AskRoss.ca

Buying a New Home Before Selling? The Dilemma of an Unsold Property

Note to our reader: For client privacy, the names of the subjects in this story have been changed. The values mentioned in this story are accurate and true. This story is used to educate Canadians based on varying situations for purchasing a new home when your old home has not sold yet.

Client Story: Augie & Frida
Combined Household Income: $230,000 +
Current Home Value: $950,000
New Home Value: $925,000

Navigating the journey of buying a new home while selling the old one can be riddled with challenges. Augie and Frida encountered a common yet stressful problem: they entered into an agreement to purchase their dream home (pre-construction) several years ago, but the couple was unable to sell their old home in time for the purchase completion date of the new one. By March 25, 2024, their new home had finished construction and the couple still hadn’t sold their first home.

Originally they listed their property at an inflated price of over a million during the slow-selling period of December. This resulted in no offers, which created a significant financial and emotional strain as their move-in date approached.

While initially unconcerned, the couple soon realized the gravity of their situation when their current home lingered on the market, unsold. Augie and Frida’s predicament could ultimately jeopardize the mortgage approval for their new dream home.

4 Key Missteps in Their Home Selling Strategy

1. Listed during Off-Peak Season

   They listed their old home for sale in December, a time when housing market activity typically slows down.

2. Overpriced Listing

   The listing price for their old home was set too high, making it less attractive to potential buyers.

3. Lack of Interest from Buyers

   Despite being on the market for three months, there were no offers, not even a lowball one.

4. Market Timing and Financial Planning

   Their financial planning did not account for the possibility of their old home not selling quickly, creating a significant barrier to moving forward with their new home purchase.

What They Did Next: A Bridge Mortgage Solution?

Seeking solutions, Augie and Frida encountered confusion around bridge mortgages. Commonly offered by banks, these short-term loans are designed to “bridge the gap” between the purchase of a new home and the sale of the old one.

However, without a firm sale date for their current home, Augie and Frida faced a harsh reality: the lack of a clear endpoint (the sale of their current home) meant they didn’t qualify for a new mortgage under the stricter conditions imposed by today’s higher interest rates and stress test requirements for their dream home. The bank now viewed them as risky borrowers even though their combined household income is over $230,000 and their credit scores are well over 800!

6 Critical Misunderstandings in Their Bridge Mortgage Application

1. Unclear Communication from the Bank

   The bank did not provide a straightforward explanation initially, which added to their confusion and stress.

2. Requirement for a Firm Sale

   The bank required a firm sale of their current home before granting a mortgage for the new home, complicating their ability to transition smoothly.

3. Denial of Bridge Mortgage

   Despite bridge mortgages being commonly available, the bank refused to provide one for Augie and Frida without a firm sale date, citing the absence of a clear endpoint as too risky.

4. Lack of Financial Flexibility

   Even with high household income and excellent credit scores, the absence of a firm sale made the bank view them as risky borrowers, due to the potential financial strain of carrying two mortgages simultaneously.

5. High Mortgage Rates and Stress Test

   The current high mortgage interest rates and the required 2% stress test premium further complicate their qualification for a new mortgage.

6. Urgency in Selling Current Home

   The need to quickly sell their current home led to a drastic strategy change, including a significant reduction in the listing price to attract buyers urgently.

Seek a Mortgage Professional’s Guidance Early On

Working with a mortgage professional is crucial in navigating complex situations like bridge mortgages. As seen with Augie and Frida, a lack of clear guidance from their bank led to confusion and stress. A seasoned mortgage broker could have clarified requirements, explored alternative solutions, and prevented financial risks. Their expertise is invaluable in securing appropriate financing, particularly under strict lending conditions, ensuring a smoother and more secure transition between homes.

How We Assessed The Situation

Our analysis was that no bank would extend a mortgage to the couple—their options with traditional banks were completely exhausted.

We recommended a new sales strategy for their current home. They needed to significantly reduce their listing price to create urgency. They lowered their selling price to $899,000 from over a million, hoping to attract more buyers and potentially spark a bidding war with multiple offers.

Unfortunately, the only offer they received was a lowball bid of $830,000, which they rejected. Time was running out, and the immense pressure to secure a buyer for their current home was growing.

Here’s How We Pivoted: A Private Mortgage Solution

We concluded that this particular case required a private mortgage lender experienced with complex scenarios. We went on to canvas our extensive network of lenders.

At Ross Taylor Mortgages we have access to a wide range of private lenders, each varying in their offerings and specialties, this is why it is so important for us to precisely match the unique details of a client’s situation with a lender whose strengths can best meet their specific needs. This approach ensures that we select the most suitable lender for the intricacies of each case.

Here’s What We Knew They Needed:

• Open Mortgage: Frida and Augie were determined to proceed with selling their old home, and it was crucial to avoid a high prepayment penalty. An open mortgage offers the flexibility to pay off the principal amount at any time without penalties. This type of loan is ideal for those who might come into extra funds or plan to sell their property soon. Open mortgages often have higher interest rates due to their flexibility but are beneficial for borrowers expecting a significant financial improvement, allowing them to pay down their mortgage quicker without prepayment charges.
• Reasonable fees: It was essential to ensure that the fees associated with the mortgage — including lender and brokerage fees at funding — were fair and competitive. Additionally, selecting a lender that avoids charging their clients with unexpected administrative, high renewal, or discharge fees was a priority.
• Good to work with: Based on our experience, we know which lenders provide a positive client experience and which should be avoided. Choosing a lender known for their client service was vital.
• The ability to close on short notice: The ability to close the mortgage quickly was critical, as Frida and Augie wanted to keep their options open for as long as possible in case a satisfactory offer came through at the last minute. This flexibility was key to adapting to any sudden changes in their situation.

The Result: Why It Pays Not To Buckle Under Pressure

Within just a few days of our search, Vault Mortgages presented an attractive offer. They proposed an $800,000 loan at a rate of 8.49%, with a six-month term that was open and required only 30 days’ notice for termination. Considering that traditional bank financing was no longer an option, this rate was highly competitive.

Vault Mortgages implemented a unique strategy by using both the new and the old properties as collateral, known as a blanket mortgage or inter-alia mortgage. This approach significantly reduced the risk for the lender, making the offer feasible.

By the end of March, we successfully completed the purchase of their new dream home by using this private mortgage solution. Frida and Augie were immensely relieved by this outcome.

Their patience paid off handsomely, within two weeks of finalizing their new mortgage, they sold their old home for $950,000. Their decision to resist rushing the sale added an additional $120,000 to their pockets, validating their strategy to wait for the right offer.

Key Takeaway: Navigating Real Estate & Financing Challenges

The journey of Augie and Frida from facing the potential jeopardy of their new home purchase to successfully navigating their complex situation illustrates a vital lesson. Be sure to seek early and expert mortgage advice when dealing with challenging real estate transactions, especially when timing and market conditions are not in your favor.

By leveraging the expertise of a seasoned mortgage broker and pivoting to a private mortgage solution, Augie and Frida not only secured their new home under pressing circumstances but also managed a successful sale of their old home at a better price.

Their story shows that with the right guidance and strategies, even the most daunting financial obstacles can be overcome, leading to success in real estate transactions.

FAQ: What is a bridge mortgage (financing)?

A bridge mortgage is when you get approved for a regular mortgage for the new property you are buying, PLUS short-term financing (mortgage) to cover your down payment and closing costs until your current home sells. This financing option or temporary mortgage is the bridge mortgage. It essentially helps you “bridge” the gap between the time your first home is sold and your new home purchase is complete. This is why the solution is called a bridge mortgage.

Learn more about bridge mortgages → 7 Things You Need To Know About Bridge Mortgages

Ask Ross Related Resources

• Private Mortgages | Mortgage Services | ASK ROSS
• When Is a Private Mortgage the Best Solution?