The answer – bridge financing!

If you purchase a new home before your current home sells, you might not have the money needed for the down payment because it will be tied up in the equity of your current home. 

A lender will provide you with bridge financing until you receive the cash from the sale of their home to complete the down payment portion. 

For example: If you sell your house with the new owners taking possession on June 1 but you are taking possession of your new home on May 1, bridge financing essentially lends you the down payment for a short period until the sale of your existing property closes and the new owners take possession.

How much does a bridge loan cost? Bridge loans are usually priced based on Prime and, these days, are typically Prime plus 2-4%. The interest rate will certainly be higher than your mortgage’s interest rate but considering the short time horizon, the interest rate is almost inconsequential and typically ends up being less than a couple hundred dollars for the typical bridge loan.

Lenders will also charge a flat administration fee to set up a bridge loan between $200 and $500. This usually ends up being more than the total bridge loan interest for the period.

What is required to arrange a bridge loan? Both the sale of your current home and the purchase of your new home need to be “firm” – meaning that all conditions have been removed on both contracts. 
Bridge loans can’t be open-ended for institutional lenders and typically bridge loans are restricted to 60 days although some lenders will allow exceptions. 

If you don’t have a firm selling date you may need to consider a private lender for the bridge loan.  

The qualification process with your mortgage broker will identify the need for bridge financing (due to the down payment coming from equity in your current property) but it should be noted that not every mortgage lender is set up to provide bridge loans.

Here is another great article on how bridge financing is calculated and, more importantly, how little it can cost you to get moved into your new home without the stress of having to get your old house ready for the new owners at the same time.