Buying a house before selling? What you need to know.
Maybe your family has grown. Maybe you’re relocating for a new job. Maybe you’ve just found your dream home. Whatever the case, if you own a home and need to buy a new one, you’re faced with a common dilemma: What should you do first? Is it better to sell your old home or buy your new home first?
Conventional wisdom has been that you should always sell your old home first, mostly to eliminate the possibility of getting stuck paying two mortgages. But does that still apply? “While it still makes sense for some homebuyers to sell their old home before buying a new one, that’s rarely the case today,” says Brian Gubernick, Homeward’s Chief Real Estate Officer. “Today’s homebuyers have more options at their disposal, and they need to carefully consider which option best fits their personal situation.”
Let’s look at the pros and cons of buying before you sell, along with the different options that allow you to do that.
Benefits to buying before selling
There are several great reasons to consider buying your new home before selling your old home:
- It’s a seller’s market and you need to move fast. A seller’s market is when the demand for homes is greater than the supply of homes available for sale. Since demand is high, a seller’s market means you have to move quickly to get the home you want. A home sale contingency in your offer may spook the seller or delay the closing so that’s not an option. It’s also important to note that waiting to sell your old home until after you’ve purchased your new home is less risky in a seller’s market.
- It’s your dream home. You don’t want to miss out on the home of your dreams. If you’ve found the perfect home for you, you need to make an offer ASAP.
- It’s less disruptive. Trying to sell the home you’re living in is challenging. You need to stage it, keep it clean, and leave the house anytime a showing gets scheduled. This is especially hard if you have children and/or pets. If you buy before you sell, all these problems disappear. You can move out before you list the home, get it ready, and skip the showings and open houses.
- You can avoid moving twice. If you sell and then buy, you may be stuck moving out of your old home on the buyer’s timeline. For many people, this entails the added expense and inconvenience of putting your stuff in storage and living in temporary housing.
Cons to buying before selling
While those are compelling reasons to consider alternatives to the traditional transaction, buying before selling may not always make sense. Depending on how you do it, buying before selling can involve some additional risks and stressors:
- It can be expensive. One of the greatest risks to buying before selling is that you may end up with two mortgages if your old home takes time to sell. That can be expensive and isn’t doable for most people.
- It can make getting mortgage approval harder. If your mortgage lender knows you plan to buy a new home before selling your current home, they will want to confirm that you can cover all expenses for both homes. This likely means needing to prove you have a sufficient debt-to-income ratio, and it could mean higher interest rates.
- You may feel pressured to sell quickly. For all of the reasons mentioned above, buying before selling can put pressure on you to sell your old home quickly. That may mean you’re tempted to reduce the price to increase the odds of a fast sale.
Ways to buy before selling
Buying before selling can include some risks. But for many homebuyers, the pros outweigh the cons. If you’re one of those people, there’s good news: You’ve got a lot of options available to you. There are several different ways you can buy a new home before selling your old home, including:
- Making a contingent offer
- Using a bridge loan
- Using a home equity loan
- Making a cash offer
Making a contingent offer
Home sale contingencies are relatively common. When you make an offer with a home sale contingency, you’re making your purchase of the new home conditional on your ability to successfully sell your existing home within a period of time. If you can’t sell your old home, then your offer on your new home becomes void. You can walk away and recoup your earnest money deposit.
While that might sound great for you as a homebuyer, sellers don’t like contingent offers. Accepting your contingent offer introduces uncertainty into the transaction, and sellers want certainty. This means that if a seller has multiple offers for their home, you can virtually count on your contingent offer falling to the bottom of the pile.
Using a bridge loan
Bridge loans are short-term loans that can enable you to buy a new home before selling your old home. When you take out a bridge loan, you use your existing home as collateral to secure a short-term loan. You typically use this loan for a down payment on a new home or to make payments on your existing home. Terms on bridge loans vary widely, but they’re typically designed for repayment within six months to three years.
Here’s the problem with bridge loans: they’re expensive. Due to their short-term nature, bridge loans typically carry much higher interest rates and origination costs than conventional mortgages. Because it’s a separate loan, a bridge loan also comes with its own fees and terms.
While bridge loans can work in some situations, they’re costly and risky. The worst-case scenario is that you could end up with three payments: your old mortgage, your new mortgage, and your bridge loan payment.
Using a home equity loan
If you own a $300,000 house and only have $100,000 left on your existing mortgage, that means you have $200,000 in equity in your home. Unfortunately, under normal circumstances, you can’t access that $200,000 until you’ve sold your home.
Home equity loans change that. They give you a way to access your equity in your current home before you sell it. You can think of a home equity loan as a second mortgage on your existing home. That might sound just like a bridge loan, but home equity loans can be much longer-term, which means you’ll typically be able to secure a lower interest rate on a home equity loan.
Let’s continue with the example from above. Say you wanted to access some of that equity for a down payment on a new home. You talk to your lender, and they offer you a home equity loan of $100,000. If you accept the offer, you’d get that $100,000 in a lump sum and you’d start paying the lender back in monthly payments (just like with a mortgage).
You could then use that $100,000 as a down payment on your new home. If you then sold your old home for $300,000, you would use the proceeds to pay off your original mortgage and the home equity loan, leaving you with just your new mortgage.
Making a cash offer
Making a cash offer is the ideal way to buy a new home. When you make a cash offer, you’re signaling to the seller that you bring less risk to the table and can close faster. The data shows that this is music to a seller’s ears: homebuyers with cash offers are more than four times as likely to win a bidding war.
There are two primary ways to make cash offers on a home: Use your own cash or use a program like The Homeward Cash Offer. “Cash offers used to be an option that was only available to the wealthy,” says Julie Youngblood, real estate coach and Homeward Partner Lead. “Today, thanks to solutions like The Homeward Cash Offer, average homebuyers have a way to make all-cash, contingency-free bids.”
Using your own cash to buy a home is exactly what it sounds like. If you’re fortunate enough to have the money at your disposal, go for it. It’s simple and straightforward. Unfortunately, it’s also not an option for most people, especially since the average home price in the United States is more than $350,000.
The Homeward Cash Offer and our Buy before you sell solution have changed all that. Tim Heyl, Homeward’s CEO and Founder, created Buy before you sell to solve his clients’ real estate challenges. “I kept running into the same problem: buyers couldn’t make an offer on a new home until they sold their old home,” he explains. Heyl watched his buyers get stuck paying two mortgages, moving twice, or worse — missing out on a home they loved.
"Buying a home should be fun and exciting, but many of my buyers were anxious," he remembers. "They felt rushed to make decisions and sometimes they made really bad ones." The process is pretty straightforward. First Homeward buys the home you want with cash. Then, once you finalize your mortgage, you buy the home back from them.
“I highly recommend it” Liz, a recent Homeward customer, describes her Buy before you sell home purchase this way: “We were able to buy our dream home with a cash offer, move into our dream home, and then sell our old home without worrying. Best experience ever, hands down.”
Buy before you sell offers a calmer, more convenient experience for homebuyers who also have a home to sell. If you're a homebuyer interested in learning more about buying before you sell, schedule an appointment with a Homeward Advisor.
If you're an agent interested in turning contingent clients into cash buyers, schedule an appointment with a Homeward Advisor.