How to Buy a House When Your Current Home Hasn’t Sold
With the spring homebuying season kicking off, now may be the time to get serious about house hunting. But if that’s true for you, that is also true for thousands of other homebuyers.
In many parts of the country, real estate markets are still extremely competitive. To move quickly, you might plan to buy a new home and sell your old home at the same time. But how?
Buying a house before your current home has sold requires some strategic planning, as well as a strong stomach — there’s the potential of carrying two mortgage debts at the same time. We’ll discuss some different ways you can ease the stress, and what types of mortgages will allow you to accomplish this.
Why you might need to buy and sell at the same time
Most home sellers are concerned with two things: getting the highest price possible for their home, and closing the sale as quickly as possible. In a perfect world, you could make an offer on a new home contingent on the sale of your current home.
The problem is, sellers in very active purchase markets won’t accept them, or they’ll add language to the contract giving them the right to entertain offers without contingencies while you’re trying to sell your house. This could leave you scrambling at the last minute to come with an alternative plan to buy the house, or scrap the purchase completely.
Here’s a few reasons why you might find yourself in a situation where you need to sell before you buy.
You’ve found your dream home and you don’t want to miss out
If you’ve been eyeing that house on the cul-de-sac lot in a neighborhood close to where you work, smack dab in the school district you want your kids to go for high school, you may want to move sooner than later. Hot neighborhoods sell houses fast, and if you don’t act fast, you may miss out.
It’s a seller’s market
With very little inventory for homebuyers to choose from, finding a new home is harder on homebuyers. When the spring buying season kicks in, the competition can be fierce, which means it’s highly unlikely you’ll get an offer accepted if you have to sell your home first.
Your home needs work to sell, and you’ve got kids
It’s very difficult to sell a home that needs significant maintenance, and managing multiple kids can make repairing the home more difficult. It may be more desirable to have the kids settled into the new home so the renovations and maintenance can be done without interruption, and without any new damage being done.
You’re buying a downsize house
If you’ve lived in the family home for decades, there may be a lot of things to go through before you move. If you’re downsizing, it may make sense to buy the new house first you can figure out what you can fit, and then invite the kids, grandkids, and if applicable great grandkids to come and help sort out what to keep what to give away or trash.
You’re being relocated because of a job
If you’ve just gotten that six-figure dream job, that could mean a relocation. Unless your employer is picking up the tab on your new home, chances are you’ll have a transitional period where you own two homes.
3 questions to ask yourself before going this route
Before you put the for sale sign up, and start looking with a buyer’s agent, here’s some things to consider.
Do you have the financial means to handle expenses on two homes?
Depending on how fast houses sell in the neighborhood your current home is located, you may face a situation where you are handling the expenses on both your new home and your existing home. The lag time between the time you close on the new home and have to make a first payment eases some of the initial financial pain.
But if your home takes a while to sell, that means two water bills, two electric bills, and two house payments. You’ll need to continue paying property taxes, homeowner’s insurance and homeowner’s association dues as applicable, even if you don’t have a mortgage payment.
Bottom line: It doesn’t make sense to buy something new until your home sells if you don’t have an asset cushion or extra disposable income.
Do you need the money from the sale to qualify for the new home?
The higher your down payment the lower your monthly payment, so if you’re trying to keep your new home payment somewhere in the ballpark of your prior home, that may be difficult to do unless you have an alternate down payment source if your current home doesn’t sell quickly.
We’ll discuss some other ways you can still make the down payment on your new home in the section below on qualifying for a new mortgage when you still have a mortgage on your current home.
Do you have the time to manage two households?
It takes a lot of time and energy to move into a new home, and there are often many projects that need planning and oversight as you get settled. While you may not have day to day decisions to make with your current home, you’ll still need to maintain it, and track the progress of the sale with your realtor.
You may have to deal with nosy neighbors, homeowner’s association guidelines for how your real estate signs and open houses are handled, and vandals that are more likely to target a vacant home than an occupied home. If you don’t have the patience or time for dual homeownership, you may want to wait to buy until your current home is sold.
How to get a new mortgage when you still have a mortgage on your current home
After the housing meltdown in 2008, lenders began to see a phenomenon called “rational default,” involving customers who forged leases to show rental income on houses that were worth far less than the mortgages as they tried to get in new homes. As a result, borrowers had to prove they had at least 30% equity in the home they were keeping and renting, as well as proof they had managed rental property before.
As the housing market has recovered, Fannie Mae began to ease up on these requirements, and now there are far more qualifying options if you are trying to buy a home but haven’t sold your current residence.
Dealing with debt-to-income ratios
One of the most important factors in determining your ability to repay a loan is how much total debt you have compared to your income. This is more commonly called your debt-to-income ratio, or DTI.
The first major qualifying challenge you’ll have if you are financing a new home, but still have a mortgage on your existing one, is whether you’ll qualify with both payments. If you’re showing two mortgage payments, your DTI ratio will likely be pretty high. The good news: Automated underwriting systems are approving DTIs higher than the 43% limit suggested by the Consumer Finance Protection Bureau.
Conventional, FHA and VA loan programs also allow for a higher DTI ratio under certain circumstances. If you have strong credit scores and extra savings of three to six months worth of payments on both homes, the automated underwriting systems used by mortgage lenders may allow you to be approved with two housing payments.
Making a down payment even if you own another home
Although your ultimate plan should be to use the money from the sale of your current home toward your down payment, that won’t work if you’re buying and selling at the same time.
Making a minimum down payment with your cash on hand may be a temporary solution. That may equate to down payments as low as 0% for a VA loan, 3.5% for FHA loans and 3% for a conventional loan.
Many second-time homebuyers mistakenly assume that they can’t use minimum down payment programs to qualify for a second home, even if they purchased their current home using one of those programs. You are still eligible for minimum down payment mortgages, as long as you qualify.
FHA loans and VA loans may have additional requirements for you to confirm that you are going to live in the new home as your primary residence. However, if the new home is relatively close to your current home, government financing on the new home may not be possible
There are a number of other options for down payments you can make if you don’t yet have the proceeds from the sale of your current home. First, you need to determine how much you think you’ll net from the sale of your home. Then figure out how much you would have put down with the sale funds. This gives you a starting point to decide which of the following alternatives you want to choose.
Minimum down payment now, recast later
If you don’t have a lot of cash on hand, you can choose a minimum down payment program that you qualify for to make the purchase first. Although this means you’ll have a higher monthly payment on the new home, it also means you’ll spend the least amount possible on a down payment toward your new home.
Most lenders offer a one time option to “recast” your loan. This allows you to make a large one-time payment toward your principal, and have the mortgage recast to reflect payments based on your new mortgage.
If you don’t have access to any other down payment options, but have plenty of income to handle the higher payment of the low down payment loan, this might be a good option for you.
As an example, let’s start with a $200,000 purchase loan at an interest rate of 4.5% on a 30-year mortgage. Making a minimum down payment, your monthly bill will be $1,013.
Now let’s say you finally sell your old home and net $50,000. If you recast your mortgage with that money, your payment will drop to $760 per month, which is a substantial savings.
This requires the least amount of down payment, allowing to keep your cash on hand for other expenses you’ll need to manage two households while your home is selling. There is no qualifying documentation, no closing costs, and no appraisal needed to complete the recast.
You’ll have a higher payment on the current mortgage for as long as you have the mortgage. With less than a 20% down payment, you’ll also be paying mortgage insurance every month.
This option involves buying your new home with a first mortgage and second mortgage that “piggybacks” on top of the first mortgage. You can choose a home equity line of credit (HELOC) or home equity loan to temporarily cover the difference between the down payment you wanted to make, and the first loan balance that you would have made from the sale proceeds of your current home.
This is generally a good plan if you’ve got a high credit score, and have a good relationship with your local bank or credit union. Many mortgage banks and brokers don’t have access to this program, so you’ll need to shop around.
HELOCs and home equity loans are usually easier to qualify for, faster to approve and require less documentation. Your payment for a HELOC is usually interest only for the first 10 years, which makes it much lower, and you’ll also avoid paying mortgage insurance.
Interest rates will be higher for home equity loans, and HELOCs have variable rates, so they can fluctuate more often. There may be a close-out fee if you pay off your home equity line of credit and close it out.
Using a 401(k) or retirement account
A 401(k) or retirement account that allows you to borrow money may be a cost effective way to bridge the down payment gap until your current home sells. You should be able to take the 401(k) loan without penalties, but keep in mind that the portion you borrow against will no longer be actively traded in the market.
There are different types of retirement accounts that may allow you to take withdrawals without penalty for purchasing a home, but you’ll want to check with a tax professional to confirm if there are any penalties, especially if you are under age 59 ½.
If you’ve got a fully vested 401(k) or have a retirement account that allows you to draw money tax free for the purchase of a new home, this may be the best plan.
There are no loan costs, and the monthly payment is usually deducted pre-tax from your paycheck.
There may be restrictions on how much you can access. You are also tying up a portion of your assets in the loan, which means those funds aren’t traded in the market while the loan is outstanding.
Taking out a bridge loan
Another option may be to take out a short-term, interest-only loan called a bridge loan to cover the down payment on a new home. Rates are usually much higher than what you would find on a home equity line of credit or home equity loan, and they are also very short term — often not more than 12 months.
A bridge loan could be an option if no other options exist, but it is definitely one of the most expensive alternatives.
Since the terms are interest-only, the total combined payment between your new first mortgage and the bridge loan may be lower than a home equity loan.
The interest rates are usually significantly higher, and the loans are short term, which means you’ll have to pay them off much faster than a HELOC or home equity loan.
FAQs on buying a new home before the old one has sold
Should I refinance my current home to help buy the new one?
One common piece of advice given to borrowers considering buying a new home before their old home is sold is to take cash out from the equity in the current home before looking for the new home — this is problematic for a few reasons.
With a cash-out refinance on a primary residence, you will sign a document called an affidavit of occupancy. This document is part of your closing package and becomes a legally binding certification from you that the property will remain your primary residence for at least 12 months.
The second issue is the terms and representations you chose go into a broader lending reporting system that tracks the occupancy you chose. If you apply for the new purchase of a primary residence within that 12 month period, that’s where the trouble may begin.
If you immediately begin looking for a new primary residence, after completing the cash-out refinance of your current residence as a primary residence, the lender may look at your new home as an investment property. Occupancy fraud is something lenders take very seriously, so be wary of any loan officer that suggests this as a down payment option for a new home.
Can I just rent my old home out instead of selling?
If you have an alternative source of down payment, you may decide to rent out your current home — but if you have a mortgage on your current home, you may not qualify unless you can show rental income to offset the payment.
There are some important rules to remember and documents to keep on hand if you plan to keep your home, especially if you want to use the rental income on your old home to offset the monthly expenses. Here’s what you’ll need to keep in mind as you approach your lender when buying your new home.
You must provide a 12 month executed lease
The lender may allow the use of rental income on the house you are selling as long as you have an executed lease prior to closing. Month-to-month or AirBNB agreements are not acceptable, even though you may be able to make much more by renting a property out on a short term basis.
The lease must be prepared on a residential lease agreement standard to the area you live in.
Provide proof of tenant’s first month rent payment and security deposit
Not all lenders will require this, but some may want supplemental proof that the tenant has not only signed a lease, but has deposited the first month’s rent and security deposit. You’ll need copies of the checks from the tenant, and banking information showing the deposits clearing your account.
You’ll only get credit for 75% of the rent
Lenders anticipate that there will be periods when the property is vacant due to a tenant leaving, or repairs. This is called a vacancy factor, and the lender will reduce the total monthly rent by 25% when qualifying you with rental income.
There may be a reserve requirement
Some lenders may require additional reserves to make sure you can handle the extra payment of both your current home and the home you are buying. This is usually in an amount equal to three to six months of payments on the house you are renting.
Be sure you give yourself time to review all of the considerations involved in buying a house if your current home hasn’t sold. Highly competitive purchase markets will likely come with high pressure sales tactics.
The best way to avoid buyer’s remorse with any home purchase is to make sure you’ve analyzed the costs and benefits. This is even more important if you’re considering a homebuying decision that could double your housing expenses, or turn you into a reluctant landlord.