Deciding whether to buy or sell a house first is a crucial decision, and the approach varies for each individual. Let's explore the pros and cons of each scenario to help you make an informed decision based on your unique circumstances.

 

Should You Buy Or Sell First?

Buying or selling a house first involves different perspectives, and personal considerations play a crucial role. Some suggest selling your old home first, especially if you have a mortgage, to avoid managing two mortgages simultaneously. On the other hand, some argue for waiting to sell later to avoid being in a transitional phase between homes.

 

Buying Before Selling

Pros

One major advantage of buying a house before selling your current one is the assurance of having a place to move into once you sell your existing property. It is particularly beneficial when considering the challenges of finding short-term rentals, especially with factors like pets, children, or bulky furniture in the mix. 

Many locations might not offer month-to-month rental options for new tenants, forcing you to pay for multiple months even if you only need a short-term arrangement.

Additionally, having a new home to transition to means you avoid the hassle and cost of moving twice. You can settle into your new space without the stress of living among unpacked boxes.

 

Cons

However, the downside of selling your current house after buying a new one is the potential burden of managing two mortgage payments simultaneously. 

Homeowners need a solid plan to handle the financial implications of two mortgages or a clear strategy for selling their existing property quickly. This situation could be financially challenging, especially if selling your home takes longer than anticipated.

 

Selling Before Buying

Pros

When you sell your current home before purchasing a new one, you simultaneously eliminate the financial burden of managing two mortgages. It relieves the pressure to make a housing decision hastily. Moreover, suppose you have a temporary residence arranged after the sale. In that case, it allows you the luxury of time to ensure your next home aligns perfectly with your needs.

 

Cons

Opting to sell before buying entails some uncertainty. You may struggle to find a property that not only suits your lifestyle but also fits within your budget. While selling the home, some individuals realize they are better off staying in their current residence and investing in renovations.

 

How to Buy a House Before Selling

Purchasing a new home before selling your existing one requires careful consideration and strategic steps. Here are some potential actions to guide you through this process.

 

Check Your Eligibility for a Second Mortgage

Securing financing for a second home can pose challenges depending on your circumstances. To embark on this journey, you'll require a new mortgage and a down payment ranging from 3 to 20 percent. 

It's advisable to explore various lenders, assess your choices, and consider obtaining pre-approval for a mortgage. This pre-approval can provide insights into the size of the loan you may qualify for, helping you make informed decisions.

 

Include a Sales Contingency in Your Contract

Add a clause in the sale and purchase agreement after your offer is accepted. This clause makes your new home purchase dependent on selling your old one. While sales contingencies are common, sellers may prefer something other than them, especially if they seek a straightforward and streamlined transaction.

 

Get a Bridge Loan

A bridge loan is a brief financial solution crafted to fill the space between buying a new home and selling your current one until you secure permanent financing. A bridge loan enables you to make an offer on a new home without it depending on the sale of your existing one. It can attract sellers who prefer not to wait for a buyer's house to sell before finalizing their home sale.

Remember that these loans typically have shorter terms and slightly higher interest rates than first mortgages. Plus, they lack the tax-deductible benefits that mortgages offer.

 

Get a HELOC/Home Equity Loan

Consider obtaining a Home Equity Line of Credit (HELOC) or a home equity loan for your previous home instead of a bridge loan. Utilize the HELOC or home equity loan funds for the down payment on your new home. Remember, if you sell your old house, you'll be responsible for repaying the HELOC or home equity loan and your existing mortgage.

 

Dig Into Savings

Are you considering various ways to fund your new home? Delving into your retirement accounts is an option, though not without considerations. While it might provide immediate capital, it's important to note potential drawbacks.

A 401(k) loan could be an avenue if your employer permits. You can borrow up to half of your vested balance, capped at $50,000. Interest rates typically hover around one to two percentage points above the prime rate. However, this approach necessitates repayment with interest within five years, affecting your 401(k) contributions during this period.

Opting for a 401(k) hardship withdrawal is another route, exempting you from the usual 10 percent early withdrawal penalty (if under age 59.5). However, approval is not guaranteed, and the withdrawal is limited to $10,000. Alternatively, withdrawing funds from a traditional IRA might be more straightforward. Remember the restriction—you cannot have bought or sold a primary residence in the last two years.

If considering a Roth IRA withdrawal, be cautious. While it provides tax-free and penalty-free access to your contributions at any time, withdrawing gains early (under age 59½) incurs penalties. Before deciding, carefully weigh the benefits and drawbacks of tapping into your retirement savings.

 

Request a Postponed Closing

When nearing the sale of your current home, it could be beneficial to request a delayed closing from the sellers of your prospective new home. This slight delay can better synchronize the sale of your existing property with the acquisition of the new one. In exchange, you could offer more earnest money or pay additional closing costs to show good faith.

 

The Bottom Line

Deciding whether to buy or sell a house first is a crucial choice. If you choose to buy first, getting pre-approved is key for budget clarity, but managing two mortgages needs careful planning. Selling first eases the financial load but brings uncertainty in finding a new property. 

 

Key steps include checking second mortgage eligibility, including a sales contingency, exploring bridge loans, using HELOCs, dipping into savings, and considering a postponed closing. Professional guidance and wise financial choices are vital for a smooth transition between homes.