Are you wondering how to buy a house before selling your current house? You are not alone, as many folks wonder how to accomplish this feat.
Buying a new home before selling an existing property you own is one of those real estate topics that I know gets debated quite a bit at the kitchen table all across America. That next home you’ve always wanted often happens unexpectedly.
You might be browsing the online housing ads, or you may just be driving in a neighborhood you like when you see it – a perfect house you want and for a fair asking price to boot. It’s possible you weren’t even house hunting at all.
Unfortunately, you are still making payments on your current home.
You haven’t put it on the market yet, or you have, but it has yet to sell. Either way, you are in a tight position.
Buying another house before selling your current house is a risky proposition for anyone without a high income. It is possible, but for most people, it is not recommended.
If you have not already spoken to a real estate agent, they will probably recommend selling your current house first. Prospective buyers need to understand that if you need to write a contingent offer, it will not be looked at favorably by sellers, especially in a competitive market.
It might work in a buyer’s market, but if market conditions favor sellers, you can probably forget about it. When it’s a hot market, sellers are in the driver’s seat.
The sale of your current home could easily get in the way of having a successful real estate transaction. The question then becomes, is buying a home before selling yours a smart move?
Buying a house before selling your existing home is something only you can decide on, but there are some things worth considering.
Let’s take a deep dive into what to know about buying a house prior to selling your current house.
Home Sellers Want Potential Buyers to Be Qualified to Purchase
There are a few things that are a given when it comes to real estate sales. For home sellers, that translates to feeling confident their prospective buyers are more than qualified to purchase.
From a financial perspective, they want to know the buyer has a solid down payment and a good credit score. Sellers also want to know you have a debt-to-income ratio and monthly income that will support the purchase.
Most importantly, they want to know the sale of your home is not tied to the purchase of theirs. Most sellers want to have the confidence to know that the closing date agreed upon will happen to plan accordingly.
Home loans tied to a buyer’s current residence selling are not something any seller wants to see. Any good real estate agent representing a seller will ask a buyer’s agent to produce a rock-solid pre-approval letter. Home buyers need to understand this means proving you don’t need to sell your current house before closing on a second home.
A mortgage lender is often asked to put language into a mortgage letter stating this fact. Without this language, it will be assumed your new purchase is tied to your current property selling. We will talk about this more a bit later.
As a home buyer, you need to be prepared to prove you’re financially capable of buying a house before selling your current house. So, why on earth would you want to go through all of this aggravation?
Why not just sell your house first? Let’s take a look at some of the common reasons.
Benefits of Buying a House Before Selling Your Current House
Even though most buyers are in no position to buy before selling their current property, there are still a few benefits worth mentioning.
There is a reason you considered the idea in the first place, so it might be beneficial to review what you would have to gain. You’re probably considering buying first because you found a property that is precisely what you want or one that is such a great deal that you feel like you cannot pass it up.
The reason could be more space is needed, but you just hadn’t gotten around to be a serious home buyer yet.
This is a legitimate reason to want to buy a home, and opportunities like this can pop up, even if you have yet to sell your current home. Everyone intends to get a great deal, and everyone has a dream home, whether they have thoroughly thought through the idea yet or not.
When you come upon a house that fits these criteria, it can trigger some emotions and desires. You can picture yourself perfectly living in this new place or see how much money you will net once you sell your home.
You can also look forward to a smooth transition once you sell your house because you have already purchased your new one.
If you have the finances, you may even see the potential benefits of carrying both houses – the old one with renters paying the mortgage while enjoying your new home. This could especially be worthwhile to you if the Real Estate market is on the rise and you see the potential for selling your current home somewhere down the line for a more substantial profit.
Doing Work Before You Move In
Benefit of Buying Before Selling HomeAnother significant benefit to buying another home before selling the property you currently own is the ability to go in ahead of time and make the improvements you desire, so it is a place you will want to call home.
Some of the improvements that are a heck of a lot easier to complete when a home is vacant are refinishing hardwood floors, painting, and even remodeling projects like kitchens and baths.
Many would kill to have all of these things done before the moving truck ever pulls into the driveway.
All of these benefits are things you might gain from buying another house before selling your property. However, it is worthwhile to look at the risks of such a proposition. There are reasons why so few people go this route.
Risks of Buying a House Before Selling Your Current House
Buying a home before selling your current house can bring with it a lot of financial risks. The first thing to look at before you go purchasing the new house is your finances. Can you afford to pay both mortgages for an extended period?
Will you need to get a second mortgage or possibly a home equity loan? These options will be a short-term loan for a short time. They will be a good option to get you through the closing process until your current house sells.
The mortgage lender will want to know your finances, and it’s something you should be clear on before you jump in. Selling a house is an uncertain business, and it could take months, especially in a buyer’s market, before you can sell.
If all things go well, this will not be the case. But you must be able to cover the payments on both mortgages for some time.
If you do not have this kind of money, you probably should not buy a house before selling your current house. However, there are other ways that people have accomplished this, so they are worth mentioning.
Some of these include asking a family member for financial help for a short period of time until the old home sells. This might even be the time to ask that rich uncle of yours for help so you can make a cash offer.
Whether they are an option in today’s market is another story and will depend heavily on your particular money situation, the lending market, and whether the housing market is currently for buyers or sellers.
Some folks are in the enviable position of buying and selling a home at the same time with no financial stress whatsoever. Unfortunately, this is not the case for most of the population.
What’s Not Looked at Favorably When You Need to Sell a House First
Few sellers are interested in home sale contingency clauses; the chances are very slim a prudent seller will be except one – especially in a seller’s market. By making a contingency offer, you tell a seller that you will buy their house for a specific price if and when your home sells.
You put your home up for sale as soon as you decide to do this, and you hope that it will sell quickly so you can buy the new house. Typically, you would ask for an extended period of time to get your property under contract.
The problem with this arrangement and why so few home sellers accept it is that they lose control of their real estate transactions. A seller has no idea if you are going to do what it takes to sell your home.
They don’t know if you will price it correctly, market it right, or even have the best Realtor to sell it. The seller is virtually at your mercy to do what it takes to move onto the next phase of the transaction.
On the other hand, without accepting this type of real estate contingency, the seller can still do what is necessary to get their place sold by dropping the price.
They certainly know if you are truly serious when you put your home under contract, you will be back anyways.
A Right of First Refusal
Another typical arrangement you see in some Real Estate contracts is called a right of first refusal. You establish agreed-upon terms in a contract and give a specified amount of time that the seller has to provide you to exercise your right to proceed with the transaction should the seller receive another offer.
When the seller gets another offer, you have a short period (typically 24 -48 hours) to purchase the home before the deal dissolves – whether you have sold first or not. Today, most sellers do not need to deal with contingency clauses, but it could be worth asking if you have no other choice.
I need to make it painfully clear about this because the chances are incredibly remote the seller will accept either of these arrangements. When you submit an offer on a property, an excellent listing agent representing the seller will want to know you can qualify to purchase without selling your current home.
In fact, one of the requirements I will have for any buyer who currently owns a home and puts an offer in on one of my client’s homes is to provide a mortgage pre-approval letter that states precisely that.
The language must be explicit – “the buyer does not need to close on their existing home to make this purchase.” This assures the seller that they do not need to worry about a customer completing a transaction before acquiring their next property. Otherwise, a buyer could use the mortgage contingency clause in most Real Estate contracts as an escape clause to get their deposits back.
Regarding the right of first refusal, unless the seller knows you can qualify to buy their home without selling, it does not make sense to accept this kind of contract. A ready, willing, and able buyer has made an offer on their home – why would they want to turn around and wait for someone to say yes or no who doesn’t even qualify to complete the sale?
They would be losing a buyer in hand who has nothing to sell!
Real-World Examples
A few years back, while working with a buyer client in Southborough, Massachusetts, even though I had explained that the vast majority of home sellers would not accept a contingency sale and needed to get their home sold first, they didn’t listen.
Unfortunately for them, it took losing a home they wanted before coming to grips that they needed to get their home listed and sold first.
After being in the Real Estate business for over 34 years, I find this needs to be explained quite a bit. The are many buyers that think sellers are going to accept their contingency offer.
Many have in the back of their mind that this is normal or that they have a very salable home – SORRY, it does not work that way!
A seller could care less that YOU think your home is marketable. If you need to sell a house, you’re not in a good spot to be making offers. When you have a home to sell, you’re coming with baggage.
Bridge Loan or 2nd Mortgage
You may have heard of a bridge loan, but do not bet on being able to get one. Bridge loans allow you to combine the old and the new home payments, making it possible for you to transition from one residence to another. However, the catch with bridge loans is that you need considerable finances and excellent credit scores.
It would mostly help if you were one of the rare few that could afford the dual mortgage payments without the loan. A bridge loan was quite conventional many years ago, but this type of financing is rare nowadays.
In today’s mortgage world, you would get another mortgage. The lender would qualify you to carry your existing mortgage along with the new mortgage. This is a common route for those who can qualify to carry two mortgages.
A mortgage broker will often have your loan set up so that you make a minimum down payment and finance the rest. Even though you will have private mortgage insurance (PMI), it will only be paid until your sale closes.
Renters Can Help You Buy a House Before Your Current House Sells
When clients ask how they can buy a house before selling their current house, one suggestion will be to get their current home rented. By making your first home rental property, you’ll be covering some of your debt to help you get into the next house.
This is another avenue you can potentially look into when buying a home before selling the one you own.
You may be thinking you can just rent out the old house to cover the mortgage while moving into your new home.
While this is an option, it does carry some risks. Renters can lead to severe wear and tear on your property and have little incentive to treat it with love and care; you might.
If you plan on keeping renters there just until you can sell it, you may run into even more problems. Your renters may want to continue living there and might make it unnecessarily challenging to show the house because of this.
Regarding finances, the lender will only count a portion of the rent you collect into the equation of whether or not you can qualify to carry both mortgages.
Keep this in mind, and make sure you do your due diligence before putting in the offer on your dream home.
Buying a Home Before Selling: Do So Only If Financially Wise
Not everyone sells their current home before purchasing a new House. However, the reality of buying a home makes such actions inadvisable for most.
You may be able to do it, but make sure that it is a smart financial move before doing so. In my experience, most homeowners will opt to get their home sold first and then make an offer on their next place.
By doing so, you remove quite a bit of stress from the equation. You are a long way from the next step when the home selling process has not even started.
Of course, the next worry will be selling your home before you have found another home you really want to buy. This brings a whole different set of things to keep you up at night, including finding temporary housing and a place to store all of your belongings.
These, of course, are legitimate concerns as nobody likes to think about making a “double move.”
In Real Estate, we like to call the decision process for buying before selling or vice versa as the “chicken and egg question.” Essentially which option makes the most sense to do first based upon your life and financial position.
Only you can decide that, but these are the things you need to consider.
Final Thoughts on Buying a House Before Selling Your Current House
As you can see, there are risks and benefits of buying a new property before you have sold your current home. Hopefully, you are now better informed to make the right decision when buying and selling real estate at the same time.
