Over six million homes were sold in 2021, the highest annual level since 2006. More and more people are making moves to other places and getting into home ownership for the first time — but although selling your house is an exciting time, it can also be a stressful one.

Particularly if you’re buying a house before selling yours.

Although it’d be much more convenient for many people to have a place to move to before selling their own house, they wonder if the process is impossible. More people sell before buying, and there’s a good reason for that — they don’t want to pay two mortgages at once for any length of time.

However, there are some situations where buying first might suit you better. Let’s take a look at what that involves, as well as the advantages and disadvantages of doing it this way so you can make an informed decision.

The Roadblocks to Buying a House Before Selling

If you’re looking into how to buy another house before selling yours, it’s not just about if you’re willing to pay two mortgages until yours sells — there are two main roadblocks you need to think about, including:

• Saving for a down payment on the new house (averaging 17% for repeat buyers)
• Your debt-to-income ratio

Saving for a down payment on a house can be very difficult when you’re responsible for a mortgage every month, so you need to consider this ahead of time. In today’s competitive market, you need to make sure you have an attractive down payment so a seller is more likely to go with your offer.

The debt-to-income ratio is a little trickier, even if you have a solid down payment. This is calculated by how much your income is each month vs. your monthly payments. When you buy a home without having one already, there’s no mortgage to factor into this — but when you own more than one house, there’s a big payment that may skew your finances heavily on the side of debt.

Potential Solutions

Now that you know the main roadblocks, it’s time to take a look at potential solutions. You can use these to get past having a high debt-to-income ratio or having no down payment.

401(k) loan

Getting a 401(k) loan can help you get a bigger down payment for the house and maybe even bypass a poor debt-to-income ratio to ensure you can secure your new home. 401(k) loans are quick and often the cheapest way to get money in your hand so you can use it to make a higher down payment and therefore, have more of a chance of getting the house.

Those who have inherited 401(k)s follow a slightly different process, as they must take the money within ten years.

Using Equity From Your Current House to Buy

You can always try getting a home equity loan from your current house if you’ve paid enough of it off. You can do this to afford a down payment or even bypass the debt-to-income issue by buying the house outright.

Sales-Leaseback Contingency

A sales-leaseback contingency usually means selling your home first, but it works the same way as selling after — almost.

It gives you a certain amount of time to live in your current home — usually around a month or two. After your house sells, you have that amount of time to move out, meaning you can search for another home in that time. The issue is that the new buyer has no obligation to extend the sales-leaseback contingency, so you need to work hard to find a new house and move out in that time.

Cash-Out Refinance

Cash-out refinancing gives you a bigger mortgage that will replace your current home loan, meaning you can take advantage of the equity you’ve built up in your home. You can then access the difference between the two mortgages in cash which can be used towards your new home.

Consider Whose Name Is On the House

If you’re moving with a spouse, family, or even a friend, consider whose name is on the loan. If you can afford the same house under one name, one person with a better debt-to-income ratio can buy the house and you can add someone else to the mortgage later if you feel it’s necessary. 

Wait

It sounds obvious but if your debt-to-income ratio isn’t great yet, wait it out! You’ll pay down credit cards over time and get rid of other debt that slowly starts to bring your income far above your debt. If you can afford to wait then hold tight, pay things down, and don’t keep adding to them — that’ll likely put you in a position to buy a house before selling your home. 

The Tax Implications of Buying a House Before Selling

If you want to buy a house before selling yours, you might be worried about the tax implications. 

There is a tax exclusion called the Section 121 exclusion which means that if you have a capital gain from your main home (and meet the regulations set that categorize a house as your main home), you might be able o exclude up to $250,000 of that from your income. That number rises to $500,000 if you file your taxes jointly.

For the most part, capital gains tax is what you need to bear in mind. You pay short-term capital gains tax if you’ve owned your home for under a year or long-term for more, and the long-term can get up to 20%.

Taxes are stressful for everyone, so research how this will impact you and how you can save.

Should I Sell My House Before Buying a New One?

So now that you’re aware of the roadblocks and how to buy a house before selling your current house, what do you need to consider? Here are the things you should look at when deciding if this is right for you.

Consider Your Situation

Buying a second house before selling can be tricky, but it’s worth it for some people. Do you have a lot of belongings or kids and pets who you can’t risk being homeless with because finding accommodation might be difficult? Then buying a house first may be the best idea.

It’s hard to say for sure what you should do because everyone’s situation is different, but as long as you’re honest with yourself and weigh everything up, you’ll make the right choice.

Get the Value of Your House

Before entering any selling process, you need to make sure you get your house appraised and get its right value. This will give you a much better idea of how your finances are going to look after the process.

You can also do a home inspection to get an idea of what you’ll need to repair. While home inspections often happen during the selling process, while a buyer is already invested, there’s nothing to stop you from getting one done beforehand.

This will limit the risk of surprises and get you prepared, so you aren’t stuck with your house longer than you had to be or paying for repairs way out of budget.

Check Out Your Debt-to-Income Ratio

Before even beginning the process, you can calculate your debt-to-income ratio online. Put in all the numbers and you should get a solid idea of where it’s at. 

For a home loan, 43% is the absolute highest it can be though lenders much prefer it to be less. If your debt-to-income ratio is higher, try paying off some loans and credit cards before you go ahead, as it might just bring that ratio down to the magic number.

Calculate Mortgage Payments

You should also do a rough calculation of your mortgage payments to make sure you’d be comfortable paying this for an indefinite period of time if your house didn’t sell.

You may not know exactly what the mortgage would be on the second house, but you can look at homes within your budget on sites like Zillow, which has a mortgage calculator. 

The Advantages of Buying First

The last thing you need to look at if you want to buy a house before selling yours is a list of the pros and cons of buying first. Weighing this up will help you make the right decision.

You Don’t Have to Worry About Showings

Showing your home when selling can be a real pain. You often have to get the pets secured away, get the kids out, and go for a walk — all the while keeping the house sparkling clean because a showing could happen at any moment.

That’s not the case when you’ve bought a house first. You can get your old house deep cleaned and move into the new one, leaving it constantly staged so people can come over whenever they want to view it. 

Make Repairs and Improvements

If you want to make repairs and improvements to your home, it’s much easier to do that while not living there. You can take all the time you want to remodel your home and make sure it’s perfect for anyone who might end up living there — which also ensures you get the highest offer possible and make the most profit.

You Won’t Be Homeless

Selling a house before buying can often leave you needing somewhere to go in the interim. This might mean staying at paid accommodation or with friends or family while putting your stuff in a storage unit.

If you buy a house first, you don’t need to worry about that for the same reason. 

More Choice With Offers

People who are in a hurry to move out of their current home so they can start looking for a new one might take some lowball offers. If you can afford to pay two mortgages and exist in your new home, you won’t be tempted to do that.

The Disadvantages of Buying First

As with anything, there are some disadvantages to buying a home first. Here’s what to bear in mind.

It’s Stressful

The truth is, although the payoff is great in the end, it’s initially very stressful. You’re buying a home while preparing yours to sell and may be going through a lot of extra processes like 401(k) loans to ensure you have the money to pay for everything.

You’re Much More Likely to Hit a Snag

If you buy a home first, the average person is much more likely to find that the process falls through. Either they can’t find a home within their limited budget, they get rejected for a loan, or their debt-to-income ratio simply isn’t good enough.

You Have No Idea How Long You’ll Be Paying Two Mortgages

If you still have a mortgage on your current home, you’re stuck paying it until your old house sells. Although in a seller’s market that won’t be long and you can predict a rough idea of what’s likely to happen, absolutely nothing is guaranteed. 

You need to be prepared to pay two mortgages for quite a while, and mortgages don’t tend to be cheap.

Make the Best Call for You

At the end of the day, you need to make the best call for you. Buying a house before selling can be extremely stressful if you’re left waiting for someone to purchase yours, but it can also be the best call for a lot of people. This is particularly true if you have a solid selling plan in place and aren’t worried about this.

For instant offers on your home, check out our site today. We can connect you with buyers who are looking to make a quick offer on your house so you won’t be stuck paying that second mortgage forever.

The post How To Buy a House Before Selling Yours appeared first on iBuyer Blog.

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