Buying a House Before Selling Yours: What to Know

How to Buy a Home Before Selling Yours

Many people buy a home before selling their current house, despite the challenges. Here are some options that can help you make the purchase.

Tap Your Equity

If you have enough equity in your home, you may be able to borrow against it to afford the down payment. However, this could affect your monthly payments and your debt-to-income ratio, so you'll need to ensure you don't borrow too much.

You can use several loan options to access that equity for a down payment, or even to pay for the new property outright if you have enough equity.

• HELOC: A HELOC provides access to a flexible loan. Depending on how the HELOC works, you may get a lump sum up front and the ability to re-borrow, or you may be able to access a line of credit you can draw from as needed.
• Home equity loan: A home equity loan offers a lump sum amount based on the equity in your home.
• Cash-out refinance: A cash-out refinance allows you to refinance your current home loan while borrowing additional cash.

Freedom Mortgage can help you to explore HELOCs and cash-out refinance options so you can find a loan that is right for you.

Bridge Loan

A bridge loan is a short-term loan that allows you to use your home as collateral and access your equity to make a down payment. These loans usually require you to repay the debt within six to twelve months. You will pay off the loan as a lump sum when your current home sells. Bridge loans may offer faster approval, but the interest rate can be higher than a home equity loan or cash-out refinance.

Mortgage Recast

You can choose to borrow more for your new home and then request a mortgage recast after your current home sells. Not all lenders allow recasting, but if yours does, a mortgage recast lets you reamortize your home loan after you make a large lump-sum payment.

When you sell your home, you can pay down your principal substantially, and your lender will adjust your payment based on your new lower balance.

Retirement or Investment Loans

If you have a retirement account, you may be able to use a 401(k) loan to finance your new home purchase if your employer allows it. This involves borrowing against your retirement plan and repaying later either over time or in a lump sum.

There are risks associated with this, though, including the potential for substantial tax penalties if you don't pay your loan on schedule. You might also put your retirement at risk, and you may have to pay borrowing fees.

Rent-Back Agreement

A rent-back agreement is an agreement you make with the buyer of your home. The buyer agrees to allow you to rent back your home for a period of time after closing. This allows you to sell your home before purchasing a new one, but remain in the house until you are ready to move (as long as the agreement extends that long).

Home Sale Contingency

A home sale contingency is a common homebuying contingency you can use as an alternative to buying a property before selling your home. You will make an offer on your new home contingent on your current home selling. When your current home sells, you can close on the new home.

Pros and Cons of Buying a Home Before Selling Your Own

If you are ready to buy a home but haven't sold your old house yet, you need to consider the pros and cons of moving forward.

Advantages of Buying Before Selling

These are some of the biggest advantages of buying a new home before selling your old one.

• Only having to move once: When you buy a new home first, you can move directly into the new home.
• Not having to rush when buying your new home: You won't have a time deadline for finding a new home if you are still living in your old house.
• Easier to show your old home while living elsewhere: Once you have moved out of your old home, you can keep your old house ready to show anytime, making it easier to sell.

Disadvantages of Buying Before Selling

There are also some disadvantages associated with buying a new house before selling your old one.

• Double mortgage payments and monthly bills: You’ll have to cover the carrying costs of two homes until your old house sells. This approach may affect your eligibility to claim the mortgage interest deduction on one or both homes, depending on which is your primary residence and your total mortgage loan balance.
• Potential for difficulty getting loan approval: It may be more difficult to meet your lender's debt-to-income requirements and down payment requirements if you have an existing mortgage payment and you don't have the proceeds from your home sale.
• Tied-up equity: The cash you have in your current home is tied up, so you can’t use the equity to help fund your new purchase without borrowing against it.
• Unpredictable selling timeline: Since you can't predict when your current home will sell, you have no way of knowing how long you must carry extra expenses.
• Tax implications: Buying a house before selling your other home can have multiple tax implications. Even if you’ve paid off the mortgage on your current home, you’ll have property taxes and other expenses. It can also affect deductions and capital gains tax. Consult a tax advisor regarding the deductibility of interest and charges.

Should You Sell Your Home Before Buying a New One?

Some buyers must sell their home before buying a new one to afford the purchase. If so, you can often limit risk by making a contingent offer to buy a new home once your house sells. That way, you'll have a new home lined up and can hopefully time your closings to move in immediately.

However, you should weigh the pros and cons carefully and make a decision based on your financial situation and your goals.

Homeowner Tips for Buying a Home While Selling

If you are hoping to buy a home while in the process of selling your current home, here are a few key things to consider.

1. Calculate the total monthly costs of carrying two homes to make sure it is affordable and make a detailed budget.
2. Calculate your closing costs to confirm whether you will have the money to complete the purchase before selling your current home.
3. Explore financing options like a HELOC or cash-out refinance to see if you have options for accessing the cash you need for your new purchase.
4. Consider how long it is likely to take you to sell your current home given market conditions.

Final Thoughts: Is Buying Before Selling Right For You?

Deciding whether to buy a home before selling requires careful consideration. A mortgage loan professional at Freedom Mortgage can help you decide what makes sense for your situation. Contact Freedom Mortgage today to learn about your borrowing options and find a loan that's right for you.