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In an ideal situation, the sale of your old home would align perfectly with the purchase of your new home. But real estate transactions are often a little messier, and the timing won’t necessarily line up perfectly. You might end up selling your existing home — and having to vacate it — before you find a new one, leaving you to undergo the expense and hassle of temporary housing.
A desire to sidestep that sort of scenario might leave you to wonder: Should I buy a home first, before selling my old one? Let’s explore the pros and cons, and walk you through the complex choreography involved.
Buying a house before selling the old house
While buying a house before selling your old one isn’t ideal, it is possible. Here are some of the advantages and disadvantages that come with this scenario.
Advantages of buying a home before selling
- You’ve a place to go: If your old home is snapped up fast, you won’t be left without a roof over your head. Moving is never fun, but being able to move into your new house whenever you want — or even gradually moving items as opposed to doing it all at once — can help ease the burden.
- Avoid expenses: With a new home ready and waiting, you won’t need to worry about the costs of interim or storing your furniture — which could run into many thousands of dollars as the months roll by. Or pay moving expenses twice.
- Can move fast if you see a place you like: Although the real estate market is slowing down from its red-hot highs of the last two years, inventory is still low and desirable properties go within days of listing. If you spot your dream home, why wait? It may well be gone in a month or two.
- Don’t have to live in a house while showing it: Keeping your existing home clean for open houses and private showings can be a headache, especially if you have pets or young children. Not to mention the annoyance of disrupted schedules and having to make yourself scarce.
Drawbacks of buying a home before selling
- How to afford it: Where’s the purchase money to come from? Most people use the proceeds from their existing home to buy the new one — or some of the profit for the down payment, at least. Unless you’ve tons of savings or easily liquidated investments, if you buy a home before selling yours, you’ll need to worry about how to finance it — second mortgage, anyone?
- Carrying two mortgages: Let’s say you do get approved for a second mortgage. Two monthly house payments mount up, taking a big bite out of a budget, even for just a short while. And there are other expenses of running two households — utilities bills and property taxes, to name a couple.
- Sellers will be skeptical: Buying before selling an existing home adds a layer of uncertainty about your bid that some homeowners may prefer to avoid. The sellers of the home you’re purchasing may be concerned about your ability to afford it — or that you’ll back out or delay things if you run into hassles unloading your current place.
How do you buy a house before selling?
Buying a house before selling an existing one is a delicate dance. Here are some potential steps to take.
See if you qualify for a second mortgage
Financing a second home could be a struggle, depending on your situation: You’ll likely need a new mortgage and a down payment of at least 3 to 20 percent. Shop around for lenders, see what your options are, and consider seeking preapproval for a mortgage to help determine how big a loan you qualify for.
Put a sales contingency in your contract
With a sales contingency — a clause in the sale and purchase agreement you sign once your offer’s accepted — you indicate that the purchase of your new home is contingent upon the sale of your old one. Sales contingencies are fairly common, though the seller won’t love it, especially if they’re looking for a simple, streamlined transaction.
Get a bridge loan
A bridge loan is a short-term loan that’s designed to cover the gap between purchasing a new home and selling your old one until you’ve secured permanent financing. “With a bridge loan in hand, you can make a home purchase offer that’s not contingent on selling your current home,” says Sean Simon, mortgage loan originator at Planet Home Lending. “That will appeal to home sellers who don’t want their home sale to stall while they wait for the buyer’s home to sell.”
One caveat: These loans generally come with short terms, and interest rates may be slightly higher than what you’d see with a first mortgage. They won’t have the tax-deductible advantages of mortgages, either.
Get a HELOC/home equity loan
As an alternative to a bridge loan, you could get a HELOC or home equity loan on your old home, and then use those funds for a down payment. Just keep in mind that you’ll need to repay your HELOC or home equity loan in addition to your old mortgage, assuming your old home sells.
Dig into savings
Tapping into your retirement accounts is another option, though doing so isn’t necessarily advisable, as you may miss out on years of investment growth.
If your employer offers the option, you could take a loan of half of your vested balance, up to $50,000, from your 401(k) to help with the cost of your new home. These loans generally come with interest rates of around one to two percentage points above the prime rate.
While you won’t need to pay the 10 percent early withdrawal penalty that usually applies with 401(k) withdrawals, you’ll need to repay your loan with interest within five years, and you won’t be able to contribute to your 401(k) until it’s paid off.
Getting a 401(k) hardship withdrawal may be another option to avoid the 10 percent early withdrawal penalty (if you’re under age 59.5), but if you aren’t approved for it, you’ll incur the penalty. And it’s limited to $10,000 anyway. It might be easier to withdraw such funds from your traditional IRA. In both cases, you can’t have bought or sold a primary residence in the last two years.
A Roth IRA withdrawal may be the better option, though you’re still dipping into your retirement savings. Your own contributions to a Roth IRA can be withdrawn tax-free and penalty-free at any time, though you will incur a penalty if you withdraw any gains early (and are under age 59½).
Ask for a delayed closing
If you’re getting close to selling your home, you might consider asking the sellers of your new home for a delayed closing. Putting off the closing slightly may help better align the sale of your old home with the purchase of the new one. In exchange, you could offer to put up more earnest money or pay some additional closing costs, just to show your good faith.
Alternatives to buying a house before selling yours
Buying a home before selling yours sounds too tricky? Here are some alternatives to consider.
Rent out old home
Don’t sweat selling: Try renting your old home instead of putting it up for sale outright. The rental income from your old home could be used to offset the cost of your new one. Consider working with a property management service to screen prospective tenants if you go this route. You could offer a rent-to-own contract, too.
Sell to a real estate brokerage
Some real estate brokerages, such as Orchard or Homelight, offer a cash-for-homes service somewhat like iBuyers. Basically, they’ll guarantee to buy your property, sometimes even fronting you the funds for a new home. Of course, if you buy a property listed in their network, all the better.
Even if you don’t opt for this route, at the very least engage a savvy real estate agent — one whose specialty is selling homes fast or is adept at representing both buyers and sellers (since you are both!).
Sell home first
You could wait until you sell your home before buying another. While doing so might result in you losing out on a hot property, you could also save yourself the headache of trying to secure financing and making payments on a new loan in addition to a mortgage on your existing home. There’s even an arrangement, called back-to-back escrow, that allows you to quickly close on both transactions.
“Strongly consider selling your first home before buying a second home,” says Christa Kenin, attorney and real estate expert with Douglas Elliman. “Unless you are prepared to carry two homes, sell your first home at a discount, or you don’t need funds from your first home to purchase your second home, this makes the most sense from a financial standpoint.”