Usually, you want to sell your previous home before buying a new one, but that order of events isn’t set in stone. If you can secure financing, you might be able to move into a new place before selling your current property.
Here’s how to buy a house before selling your house.
[SEE: Current Mortgage Refinance Rates]
Why Buy a House First and Sell Later?
One reason to buy a home before selling is that your current home no longer meets your needs and you’re hoping to get into a new place as soon as possible.
“The biggest one is life events. Typically, there’s a reason why people want to move into a home, whether they have an expanding family or they’re retired and want to downsize,” says Todd Potter, certified mortgage banker and vice president of mortgage lending at PenAir Credit Union.
Other possible reasons to buy first are that you need to move right away to take advantage of a job offer or another opportunity or to give yourself more time to move from one house to another.
And if you believe you’ve found your dream home, you might want to snatch it up — without having to wait for your current home to sell.
“When people see the property that they really like, and it’s a very competitive situation, the sellers of the house are going to favor the offers that don’t have a contingency on the sale of the old house,” says Javier Ubarri, president of The Federal Savings Bank.
How to Buy a Home Before You Sell Your Old Home
Depending on your situation, financing a new home before you’ve sold your current one could be easily doable, a stretch or completely out of reach.
Talk to some lenders to see if they’re able to prequalify you for a new loan while you’re still paying your current mortgage. They may recommend strategies like using a bridge loan for your down payment.
Apply for a New Mortgage
Lenders will ask you to provide documentation of your income, assets and debts, including your current mortgage payment.
Lenders then calculate your debt-to-income ratio, or DTI, which is your total monthly debt payments divided by your monthly gross income. If you’re planning to pay two mortgages at once, both the current and new mortgage payments need to be included in your DTI calculation.
Your DTI is a crucial factor in determining whether you can get a mortgage and which loan programs you’re eligible for. These are the DTI requirements for major loan types:
— Fannie Mae. Typically, the DTI shouldn’t be higher than 36%. A maximum DTI of 45% is allowed for manually underwritten loans, while a DTI of up to 50% is permissible with automated underwriting.
— Freddie Mac. The DTI should generally be no higher than 36%, but a maximum of 45% is allowed in some cases.
— Federal Housing Administration loans. The maximum DTI is generally 43%, but higher ratios may be allowed if there are compensating factors.
— Department of Veterans Affairs loans. The maximum DTI is usually 41%. However, the VA allows lenders to use a more flexible “residual income” calculation and disregard the DTI if they choose.
— U.S. Department of Agriculture-guaranteed loans Generally, the DTI should be no higher than 41%. Lenders may allow a DTI of 44% or even slightly higher with compensating factors, such as three months of cash reserves or an energy-efficient home.
Another potential sticking point is that you’ll need enough money to cover the down payment and closing costs on your new mortgage, without using cash from the sale of your previous home. You might be able to draw on savings or investments, or you could borrow against home equity.
[READ: Today’s FHA Mortgage Rates]
Use a Bridge Loan
Some lenders offer bridge loans, which are short-term loans that allow borrowers to purchase a new home before closing on the sale of their current home.
“They’re basically using the equity in their current home for the down payment on the purchase of the new home while they wait for their current home to sell,” Potter says.
You may not have to make payments on a bridge loan during its term. Bridge loans can even be used to pay off your old mortgage balance, so you don’t have to make two mortgage payments while waiting to sell your old home. Bridge loan terms generally run six to 12 months. Their interest rates are based on the prime rate and run higher than rates on most other home loans.
Use a Home Equity Loan or HELOC
Another option is to tap into your home equity with a home equity loan or HELOC and use the funds to close on your new home. You then repay the loan or line of credit when you sell your old one. However, lenders don’t usually approve home equity financing if your home is already on the market.
Pros and Cons of Buying a Home Before Selling
On the plus side, buying a home before selling means you have the flexibility to act fast and secure a home you want — especially in a competitive market. It can give you more time to move out and get your old home ready for viewing. Another plus is that you won’t have to deal with showings while living there. And if you aren’t facing a deadline to sell before closing on your next property, you can wait for better offers and possibly sell for a higher price.
At the same time, qualifying for a mortgage can be a challenge if your income isn’t high enough to support two payments or if you have other obligations, like student loans or car payments.
“People aren’t thinking about the financial aspects. They’re just thinking it’s an easy option, which for most people it’s not,” says Jennifer Beeston, executive vice president of national sales at mortgage lender Rate.
Even if you can get a mortgage without selling first, it doesn’t mean you should. Think about whether you’re OK with the worst-case scenario in which it takes a long time to sell your previous home, and consider whether you could realistically carry two mortgages.
“Sometimes you’ll hear the horror stories of people who stretched so that they could buy that other house before they sold their house,” Beeston says, “because they were told by their real estate agent that their house was going to sell quickly and for XYZ. But then it’s sitting on the market and sitting on the market and the price goes down. And they’re in this situation where they have less power because they have to sell it now as quickly as possible.”
[2025 Mortgage Rate Forecast: When Will Rates Go Down?]
Other Strategies
If taking out a new mortgage while you’re still making payments on your current house sounds burdensome, consider one of these alternatives.
Make a Contingent Offer
If your offer is contingent on selling your current house, you aren’t required to go through with purchasing the property unless your house sells first. Sellers may favor offers that don’t have this contingency or may want to keep their options open in case other offers come in. But you can avoid owning two houses at once.
“I think that most of the time that will benefit the buyer because it will give the buyer time to sell their existing home in an orderly fashion over a specific period of time,” Ubarri says.
Rent Back Your Home From the Buyer
If you want to have more time to move, a possible solution is to sell first but enter into a rent-back agreement with the buyer. These agreements may allow you to remain in the home for up to 60 days after closing the sale in exchange for paying rent to the new owner. You’re more likely to successfully negotiate a rent back if your current home is located in a market with limited inventory, where you have more bargaining power as the seller.
Turn Your Home Into a Rental Property
Renting out your current home to tenants can be an alternative to selling the property. You might then be able to use part of the rental income to qualify for your next mortgage.
It’s not practical to rent out a house while trying to sell it, so go this route only if you’re committed to holding onto the house.
“If you’re considering turning it into a rental property, you should be considering turning it into a rental property for at least a year,” Beeston says.
Sell to a Cash Homebuyer Company
Some companies offer to buy homes quickly for cash, which could allow you to close on the sale of your current house in time to move into your new home. The downside is that you may sell for considerably less than the price you would get on the open market.
If you’re thinking about selling to a homebuying company, first research your home’s value and decide how much of a price reduction you’re willing to accept. And look into each company’s reputation carefully to make sure it isn’t a predatory business or a scammer.
“It’s interesting to explore, but you need to make sure you’re reading the fine print, you understand the fees, you understand the process,” Beeston says.
[See: Best Low- and No-Down-Payment Mortgages]
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How to Buy a House Before Selling Your House originally appeared on usnews.com
