Relocating is stressful, no matter how you do it. But when you need to buy another house before selling your current one, it gets even harder. Owning a home means that you're a bigger risk to lenders as well as sellers.
In some cases, you might need to agree to sell your current home before your purchase goes through. In others, a lender might ask for proof that you can afford your existing house as well as your new one.
It can be a sticky situation, but sometimes it’s inevitable. It can even be desirable if you know how to handle it.
Why You Might Consider Buying a House Before Selling Your Own
Lenders and sellers usually prefer buyers to have sold their current house before buying their next one, unless it's intended as an investment. But that's not always how life works out. Maybe you ...
- Found your dream home and know that if you wait to sell the house you're in, the new one will be off the market.
- Want to act on a short sale or another great deal that arises due to seller circumstances. These kinds of deals go quickly, and you need to act fast.
- Live in a seller's market where your current home is almost certain to sell within days of listing. If you sell in this market before you have a new home to move into, you could end up with no place to live.
- Got a new job and need to start right away. Sure, you could get a rental in your new location, but then you'll be dealing with multiple moves at the same time as you're trying to get acclimated to the new company.
- Have extenuating personal circumstances, such as divorce or an ill family member, and need to relocate urgently.
Your reasons are probably good ones, whatever they are, but lenders don't usually take that into consideration. They just focus on the mortgage you already have and the one you want to take out.
The Challenges of Buying Before Selling
If you’re buying a home but already own one, most lenders will look at the new house as your primary residence and consider the old one to be an investment property. When they calculate your expense-to-income ratio, which is how they decide if you can afford the loan, they assume you'll be making payments on both properties. (Yes, even if you've told them that you plan to sell.)
Maybe you can carry two mortgages and you can prove it. That's great, but you probably won’t get approved for as much as you can actually afford. This will limit the purchase price that you can offer, and that will hurt you if you end up in a multiple offer negotiation process.
If you can't afford to buy another house before selling yours, though, your only recourse is to make an offer that's only good if you sell your current home. These are known as contingent offers. Some sellers can be reluctant to accept them, especially if those sellers have unrestricted offers coming in.
How to Finance Buying a House Before Selling Your Old One
You may decide to make a contingent offer if you find the house you want. Once you do, the seller might remove the property from the market and wait for your sale to go through. In other cases, though, the property could stay on the market and the seller might get a better offer.
This is known as a first right of refusal offer and it means that you'll have 72 hours, or perhaps less, to remove the sale contingency and buy the property with your existing home unsold. All of the conditions involved in purchasing a second property will apply and you might not get approval. The seller would probably then refund your deposit and demand cancellation of the contract.
You may also be able to use a bridge loan, which uses your current home as collateral to let you buy the new one. You don't have to have a contingency in place, but your interest rates could be up to a full percentage point higher than a standard 30-year fixed-rate mortgage.
And you'll still have to qualify for two mortgages.
The Sale-Leaseback Alternative
Another strategy, the sale-leaseback, lets you sell your home to a company that then rents it back to you. There are a number of sale-leaseback companies out there, but most of them also have cost hurdles. Fees can be as high as 13 percent and offers can be as much as 20 percent below your home's market value.
EasyKnock believes that home buyers should have better alternatives, so we've developed a new kind of sale-leaseback program called MoveAbility.
MoveAbility lets you access up to 75 percent of your current home's equity by selling the property to EasyKnock. We then rent the property back to you in exchange for a fixed monthly rent and 1.5 percent of the home's market value. Meanwhile, you can use your equity to put down more money on your new home, make improvements to your current property, or even just take your time to get the best possible offer.
With MoveAbility, you don't need to rush the process of selling your home. We've already bought it, so lenders won't look at you as a second home buyer. Just keep paying rent and you can buy when you want, selling on the market only when you're ready.
A Final Word
Selling your home isn't something you want to rush. If you've found your next home, you shouldn't have to pay exorbitant fees or hear that you can't afford it when you can. You have options, and EasyKnock's representatives are waiting to tell you what they are. Call or email us today.