Buying or selling a property can be stressful, no matter the circumstances. If you need to do both simultaneously, it can escalate from “stressful” to an extremely daunting experience. You want to find the best offer for your current home while ensuring you have enough of a down payment for your new property. All while the timelines need to match up, so you’re not left without a roof over your head.
Before you begin choosing the best way to buy a house while selling your own, talk to a real estate agent who can explain and break down all of your options.
Here are some factors they’ll consider as they walk you through the first few steps:
A real estate transaction can be a complex process by itself. But if you decide to buy and sell at the same time, even more steps are added that can disrupt or delay either sale.
Let’s take a look at a standard timeline for buying and selling your home, assuming there are no issues or hiccups.
The first approach to buying while selling is simply purchasing a new house before letting go of your old home.
The danger, of course, is that you may be responsible for two mortgages and could get stretched financially if something doesn’t go according to plan. And because you’re waiting to sell your current home, you typically can’t use your equity to pay for the down payment on the new property (at least, not without taking out an additional loan).
But don’t worry. There are reasonable ways to go about this route. Here’s an overview:
With a balancing market, homes are sitting on the market for longer, making it less likely your home will sell quickly than if we were in a strong sellers’ market. However, each local market is unique, so consult your real estate agent for conditions in your area.
If you don’t feel confident your existing home will fly off the market, this option can be scary. If you’re willing to take a calculated risk, however, this might be a good option for you.
When you buy with a sales contingency, it means that a contingency in your offer states that if your current home doesn’t sell by a certain date, you can back out of the purchase contract without penalties.
There are situations when a seller might consider a contingent offer. One is when your agent can explain to the seller’s agent that your current home will likely sell quickly. In that case, the sellers may take a chance and accept it.
Because many sellers use the funds they make from selling their home to finance the purchase of their new house, they can often find themselves in a situation where closing dates don’t align. In that case, the money they need from their current home’s equity isn’t quite available yet. That’s where a bridge loan comes in.
A bridge loan is a relatively high-interest loan — often secured by your current home — that can be used to fund the down payment on your new house and cover expenses if you’re juggling two mortgages. The loan is then repaid after selling your current home, usually within six months.
A home equity loan is a loan in which the borrower uses the equity in their current home as collateral. The loan creates a lien against the borrower’s house — and it also reduces the actual equity the homeowner has in their home.
Buyers don't go this route very often, since it can affect their ability to qualify for a mortgage on the new home.
A home equity line of credit (HELOC) is slightly different. While a HELOC also uses your home as security, you don’t receive your money all at once. Instead, you can draw on your line of credit as needed — similar to a credit card — until you reach your determined limit. HELOCs usually carry lower interest rates, but those rates are variable, increasing and decreasing depending on certain factors.
If you have a lot of equity built up in your current house, especially if you are trading down, buying with a home equity loan or line of credit might be a viable option.
You can use your 401(k) and other retirement funds to fund your purchase, either through a 401(k) loan or a withdrawal, but it can be a riskier option.
If you withdraw from your retirement account — either a 401(k) or an IRA — before you hit 59 ½ years old, you’ll have to pay a hefty fee. Typically, the IRS will charge a 10% penalty and require you to pay income taxes on your withdrawal.
However, there is an exception for individual retirement accounts (IRA) if you are a “first-time homeowner,” meaning you haven’t owned a property in the past two years. If you qualify, you can withdraw up to $10,000 without penalty. But it’s important to note this only applies to IRA accounts, and a 401(k) withdrawal will still have a penalty if you’re a first-time buyer.
A 401(k) loan, where you borrow from your own retirement account, won’t have a penalty fee or require taxes. But you will have to pay yourself back with interest within a certain amount of time (typically five years). And if you default, it will be considered a withdrawal, and you’ll face those same penalties.
So, while borrowing from your retirement accounts may be a suitable option if you’ve exhausted all other possibilities, it does come with serious risks. Not only do you risk the penalty if you withdraw the money permanently or don’t pay back the loan, but you could also be losing out on significant future investment gains.
Do you need to sell your home to buy a new one? If you live in an area where rent is relatively high, and you can make it work financially, perhaps you can arrange to rent your house.
If you want to play it safe, you can always sell your home before buying a new one. When you go this route, you don’t have to worry about the challenges of temporarily financing two homes or buying with a contingency.
If you sell your home first and cannot find a new house, you may worry about being left stranded. One option, in that case, might be moving into a temporary rental home or bunking up with a relative until you’re able to find a new property, but that may cost you more down the line.
You have several options that can make selling before buying an attractive route.
If you live in an area with a hot buyer’s market, meaning buyers have more power, this could be a good option for you. In this situation, the market will likely help you find the right place, and you won’t have to wait too long to buy a new house after yours sells.
But, as we mentioned already, selling your home before buying a new one is not without danger. If you’re in the middle of a seller’s market, you might be left with little inventory to choose from and high prices attached to those homes. You might not find a house you like after yours sells — or, if the market is extremely hot, more competitive offers might beat you out.
You can close on a house in about a month… but you don’t have to. As the seller, you can ask the buyer for a longer closing period, which will give you more time to find a new home.
While some buyers won’t agree to an extended closing period, others might find it advantageous.
If you sell your home and can’t find a new one to buy right away, consider asking for a rent-back clause in the sales contract. In this scenario, you’ll be able to rent your home back from the new owner for a certain period of time after the sale closes — let’s say three months — enabling you extra time to search for a new home while keeping a roof over your head.
We know that buying a house while selling your current one can be a challenge, but hopefully there’s an option here that will be a great fit for you. If you’re unsure which would be the best fit for you, we can help you figure it out!