Buying a new home is an exciting time for nearly anyone, but when you still haven’t sold your old home it can get a bit tricky. When buying and selling are both on your to-do list, it can be hard to know what to do first.
Here are some tips and benefits on buying a home before selling your own.
Benefits of buying a home before selling
A common belief is that you should never buy a new house before selling your old home, but it can be beneficial if you have the financial means to make it happen. Here are the key benefits of buying first:
More time to find the right home
Buying first allows you to focus on just one transaction at a time. Instead of rushing through the buying process to find somewhere to live before your sale closes, you can take your time to find the perfect house.
More time to remodel the new home
Since you still have somewhere to live, you can take time to remodel your new home while staying in your old place, instead of immediately moving in and living in a construction zone, or staying at a hotel.
Avoid purchasing with a contingent offer
When you buy before listing your current home, you can treat the two transactions completely separate. This allows you to avoid submitting a contingent offer when buying, which tells the seller that you can buy their home only if your home sells first.
Buying with a contingency can make your offer less attractive, as sellers would rather work with buyers who can close quickly and without complication.
Avoid additional costs
You won’t have to worry about additional costs, such as temporary housing, professional movers, or storage.
How to Finance Your Second Home?
If you can afford a second mortgage and currently live in a sellers market where homes sell quickly, it can be cost-effective to buy a new home first. Here are some ways you can finance the second home.
Qualifying for an additional mortgage
If you’ll be taking out a new mortgage, your first step should be making sure you qualify.
When applying for a mortgage, the lender will calculate your debt-to-income ratio. Most lenders require that your monthly debts total no more than 43% of your gross income.
If you have a mortgage on your first home, that monthly payment will be included in your debt-to-income ratio, which can make it challenging to qualify for a second loan.
Funding the down payment
For standard conventional loans, you’ll need at least 10% of the home purchase price as the down payment, although some lenders may require a full 20%. Here are some common ways you can fund your down payment.
Taking out a loan backed by your 401k is sometimes an option, although the IRS does restrict how much you can borrow. Although you may be missing out on contributions from your employer, you’ll be able to make up for that through the equity you gain in your new home.
A cash-out refinance is a loan that replaces your current mortgage with a new home loan for more than you owe on your home. The difference between the two loans is that the new loan amount will be given to you as cash that you may spend however you want.
However, you must have good equity in your home if you want to qualify for a cash-out refinance. You will need to have at least 30 percent equity in your home. It can also cost you a lot in closing costs, so make sure you are borrowing enough money that is worth all the fees you will pay.
A home equity line of credit is a revolving line of credit, secured by the equity on your home. Note that if your home is already on the market, you may not qualify for a HELOC. If you go this route, watch for fees.
Down payment money from a friend or family member must be considered a gift, not a loan, and you’ll have to put that fact in writing with your lender. If you feel comfortable asking for gift funds from family members or friends, it can help you get the money you need for a down payment.
If you have a graduation, wedding or some other event coming up, you can ask for money that way too. Keep in mind that not all lenders will let you pay your full down payment with a gift.
80-10-10 PIGGYBACK MORTGAGE
An 80-10-10 piggyback mortgage loan is a mortgage option in which a home buyer receives a first and second mortgage simultaneously, covering 90% of the home’s purchase price. If you’re putting less than 20% down, you can avoid PMI by taking out an 80-10-10 piggyback mortgage.