My husband and I outgrew our first home only a few years after purchasing it. We loved our tiny Cape Cod-style abode, but we realized that with a child on the way, we needed more bedrooms, a larger yard, and a bigger kitchen. We decided to sell our first house and use the proceeds as a down payment for our next one — something 39% of all homeowners do, according to Zillow’s 2018 Consumer Housing Trends Report.
That summer, we listed our home with a real estate agent and, in a seller’s market, sold our home within weeks. Around the same time, we found our dream home, made an offer, and it was accepted. We scheduled both home closings on the same day and the financial process went fairly smoothly. We deposited the proceeds from our home sale, and we were able to use those funds to close on our new house. But that’s not always the case.
What happens if you buy a home before selling your current home?
Not everyone is so lucky though. If you buy a new home before your old one sells, you won’t be able to use any of the funds from the old home sale to pay for the new one.
Fortunately, if you’re in this scenario, there are a few options to consider. The first option is to tap into savings or non-retirement investment accounts, replacing the money you withdraw once you sell your home.
If that isn’t possible for you, something else to consider is renting out your existing home, so you can use that rent as income to help cover your mortgage payments. Be aware that your renters will have to be accommodating, since real estate agents will have to coordinate showings with them.
One final option is to put a sale and settlement contingency into your real estate contract, stating you can’t close on a new home until the old one sells.
What happens if you sell your home before buying a new one?
Many buyers looking for a streamlined buying process opt to sell their home before making an offer on a new one. There are several benefits to this strategy, but most importantly, buyers know exactly how much they have netted from their home sale.
They may also have more buying power in a situation where a successful sale means they can make a down payment that covers a larger portion of the new home’s purchase price.
According to the National Association of Realtors, the average first-time buyer borrows 93% of their home cost, as compared to the average repeat buyer, who borrows 84% of the agreed-upon purchase price. Keep in mind, the more you put down, the better your rate may be, and you may be able to avoid mortgage insurance, which would lower your monthly payment.
Selling before buying may also make the negotiation process easier because having an extra cushion of cash tells a seller that a buyer is motivated. It may make getting a mortgage easier too, since it can be harder to qualify for a new mortgage while carrying debt on an existing home.
There is one major downside, though. Selling first means you may not have anywhere to live after a closing. You may need to stay with family or use an extended-stay hotel and store your possessions elsewhere. If the supply of houses in your area is limited, or you have very specific features you’re looking for in your next house, you may need to rent an apartment or home while you find and negotiate your next purchase.
Some homeowners negotiate and pay rent to the new owners in order to stay in their home, called a rent-back agreement. However, there may be liability issues involved so you may want to discuss this option with an attorney.
So how do you know which strategy is right for you? Sit down with a home mortgage consultant who can look at your finances, make recommendations, and help advise you through the process. And good luck!