You’ve recently decided it’s time to buy a new home. Maybe your family is expanding. Perhaps you’re ready to downsize in your golden years. Or maybe your work has gone remote and you can finally make the move out to an area with more space. So, how do you buy a house before selling your current home?
Can you put in an offer on a new home before you’ve sold your old one?
Yes, you technically can make an offer on a house before selling your old one - but with a big “but” attached. If you’re like most homeowners, you probably need to sell your old house in order to afford your new home. Unless you’ve been approved to hold two mortgages, you’ll need to include a sales contingency.
Sales contingencies are typically big red flags to sellers. They mean uncertainty, which sellers typically want to avoid. If your old house doesn’t sell as quickly expected, it could potentially put the deal at risk.
For this reason, sellers often shy away from offers with sales contingencies. If you must include a sales contingency, you might have a harder time getting your offer accepted.
How do you buy a new home before you’ve sold your old one?
It’s one thing to make an offer on a new home before selling. It’s another thing entirely to actually close on said new home before selling. So, can you buy a house before selling yours?
The short answer is - it depends.
If you were to buy a house before selling the traditional way, you would need to be able to afford two mortgages at once. For many homeowners, the financial strain of paying two mortgages makes buying before selling the traditional way out of the question.
But let’s assume you’ve saved enough money to afford two mortgages for a period of time and are confident your old house will sell quickly. You’re not out of the woods yet. Your mortgage lender will take your old mortgage into consideration when calculating your debt-to-income ratio.
Debt-to-income ratio is one of the ways lenders determine your ability to afford a monthly mortgage payment. It’s essentially all your monthly debt payments (mortgage, auto loan, student loans, etc) divided by your gross monthly income. If you’re still on the hook for your old mortgage, your debt-to-income ratio will be substantially higher. Your mortgage lender might not approve you for a new mortgage in the first place.
Ways to Buy Before Selling Your Home
Buying a new home before selling the one you're in can be risky. However, it can be a beneficial strategy for many homebuyers. If you're thinking of buying before selling, there are many ways to do so, including:
- Making a cash offer
- Making a contingent offer
- Bridge loans
- Home equity loans
Is selling first a better alternative to buying first?
On paper, it might seem so. In reality, though, selling first and buying later is a woefully inconvenient experience for many homeowners. Here are a few things you’ll want to take into consideration if you’re looking at selling first and buying later:
Living through repairs
According to the National Association of Realtors, the median time a homeowner spends in their home is 13 years. Over that time, you’ve probably made a lot of memories - and left a few scuffs along the way.
In order to get the absolute best price for your home, it’s recommended to get it in tip-top shape before showing. Depending on the extent of the repairs your real estate agent recommends (they’ll be your expert guide in getting your house showing-ready), this could mean anything from a new interior paint job to refinishing floors to a full kitchen facelift. While an important step in getting top dollar for your old house, living alongside repairs (especially if you have pets or children) can be stressful and inconvenient.
Living around showings
So, you’ve wrapped the last of the repairs and your contractors have packed up their toolboxes. You’re out of the woods, right? Not quite. If you’re selling your house while you’re still living in it, be prepared to live alongside showings.
A critical part of the selling process, showings allow your real estate agent to give tours to prospective buyers, highlight the best features of your house, and gauge their interest. Because most real estate agents recommend the seller not be present during showings, you’ll need to be ready to vacate your house (along with your family and pets) when a buyer wants to stop by.
While your real estate agent will do their absolute best to coordinate with your schedules and minimize inconvenience, buyer interest isn’t always predictable. You’ll need to be prepared to pack up the family (and get your house showing-ready) at a moment’s notice.
Getting the timing perfect when you sell before you buy is a tricky task - especially in this market. Houses are flying off the shelves, largely because inventory continues to be low. This means your old house might sell quickly - but finding your new home might take some time.
Because of this, many people find themselves in homeowner limbo: they’ve sold their old house, but have nowhere to go. Oftentimes, the solution to this problem lies in a short-term rental and paying to move twice.
Advantages and disadvantages of buying a home before selling
There are many potential benefits to buying a home before selling your current one, including:
- Avoiding the rush: Buying a new home before selling your current one allows you to take your time to find the right property without feeling pressured or rushed. This allows you plenty of time to find a property that's just right and potentially find a better deal before pulling the trigger on something that doesn't check all your boxes.
- Timing the market: If you believe home prices will rise, buying before selling could allow you to benefit from potential appreciation. This strategy can potentially help you build equity in your new home.
- Smooth transition: Buying a new home before selling your current one provides you with a seamless transition. You don't have to worry about temporary accommodations or rushing to move your belongings. This can be particularly beneficial for homebuyers with families.
- Negotiation power: As a buyer without the constraint of needing to sell your current home, you may have more negotiation power. Sellers might be more willing to negotiate on price or other terms since you don't have the pressure to sell quickly.
However, buying before selling might not make sense for every homebuyer. Some potential disadvantages include:
- Financial burden: Owning two homes at once can cause financial strain. In this scenario, you will manage two mortgage payments and other expenses until you can sell your property.
- Uncertain selling timeline: Selling a home can sometimes take longer than expected, especially if the real estate market is slow or you need help finding a buyer.
- Potential for bridging finance: If you need to secure financing to purchase your new home before selling your current one, you may need to consider bridge financing or a short-term loan. These loans often have higher interest rates, fees, and associated risks.
So, how do you buy a house before selling?
If buying and selling at the same time is a risky endeavor and selling before buying is wildly inconvenient, what's a buyer to do? Luckily, there are a few solutions out there that can help you buy before you sell.
Secure a bridge loan
A bridge loan is a short-term loan and is most often used to help a homeowner buy their new home before selling. Lenders will typically lend you a percentage of the equity you’ve accrued in your old house, which you can then use for the down payment on your new home.
Bridge loans are not without their drawbacks. First and foremost, they are expensive. Because they are short-term loans, lenders will attach high-interest rates to the loan. Origination fees for bridge loans can also be high - sometimes up to 3% of the loan value.
Finally, they are risky. In the instance that your old house doesn’t sell, you are stuck with the debt - and at a very high-interest rate.
Use the Knock Bridge Loan™
The Knock Bridge Loan™ is designed to make buying a home before selling easier. Similar to the concept of a bridge loan, Knock lends you the equity in your current house via our next generation bridge loan. You’ll use this for the down payment on your new home.
Knock will also provide you your new home mortgage. Unlike a traditional bridge loan, repayment on the Knock Bridge Loan™ doesn’t begin for six months. Once your old house sells, you’ll repay the bridge loan. After that, your only remaining loan will be the mortgage on your new home.
Knock will also provide you your new home mortgage. This means your only working with one lender to receive the two loans. Unlike a traditional bridge loan, Knock’s rates are competitive with other lenders, and repayment on the Knock Equity Advance doesn’t begin for six months. Once your old house sells, you’ll repay the Knock Equity Advance. After that, your only remaining loan will be the mortgage on your new home.
In the instance that your old house doesn’t sell, Knock will agree to purchase your old house from you, so you don’t ever have to be worried about being stuck with the debt of a second loan. Remember, if you were to go the route of a traditional bridge loan, you’d be sitting with that debt regardless of whether your old house sold or not.
With the Knock Bridge Loan™, you can experience the convenience of buying before you sell without the financial pressures of two mortgages or bridge loans. So, that's how you buy a house before selling your old home. Happy house-hunting!
by Kate Leggett