It can be confusing to figure out how to buy a house when you already have one. Do you buy first then sell, or sell first then buy? Whether you want to move up or downsize, owning two homes during the transition may not be a good option. There are a few ways to make the move.
BUY FIRST THEN SELL
MAKE THE PURCHASE CONTRACT CONTINGENT ON SALE OF CURRENT HOME:
The way that seems safest for many people is to find a home you’d like to buy and make an offer contingent on the sale of your current home. This may or may not work, especially in a good real estate market. Many sellers will prefer to have a sure sale and having a contingency for the sale of another home may stop other buyers from considering the home. If a seller does agree to this contingency, the standard practice in our area is to include a “kick-out” clause.
KICK OUT CLAUSE:
This means the home would still be marketed (potential buyers would know about the contingency contract) and when another is received and negotiated, you are notified and given a certain time period (often 48-72 hours) to “remove the contingency”. When using the “kick-out” clause, you need to have financing lined up and be ready to honor the contract without selling your current home.
SAVINGS, HOME EQUITY LINE OF CREDIT or BRIDGE LOAN:
Buying a home before selling the current home can be done by paying cash or with a home equity line of credit on your current home. This depends on how much equity you have and how much the bank will loan for the purchase of another home. A few banks will give a bridge loan which allows you to pay interest only on the new loan until the first home sells.
RENT CURRENT HOME:
This may be a good option if you don’t mind the landlord responsibilities of maintaining another home and keeping good tenants.
REFINANCING with CASH OUT:
You may consider refinancing your current home and taking cash out for a down payment to purchase the 2nd home. This will usually get you a lower interest rate since it’s your primary residence. This should be a long-term plan to consider if you think you’ll be ready to buy a home in the next few years.
SELL FIRST THEN BUY
PROTECT YOURSELF WITH CONTINGENCY IN THE PURCHASE CONTRACT
If you decide to sell your home before buying another, make sure the wording of the contract protects you. With simultaneous closings, add special stipulations in the contracts for the new and existing home purchases.
SELL THEN RENT BACK:
This may be more difficult since many homebuyers need to take possession in a certain time period. A buyer may agree to rent for 2-3 months after closing. Their loan terms may stipulate that they must take possession within a certain timeframe. This usually works best if you have a home under contract but must delay closing due to a special situation.
FIND TEMPORARY HOUSING:
Finding a short-term lease can be more difficult but not impossible. Many local apartment complexes offer 3 or 6-month leases. This would allow you to sell your first home with less stress. You will be prepared to purchase right away when you find the right home.
Making the decision of how to buy a house when you already have one may take a lot of thought. Knowing the current value of your home may help in making your plans.