I Own My Home. Do I Need to Sell to Buy a New House?
Selling and buying a house at the same time can feel like juggling flaming torches. In this guide, we'll make the process easier to understand by providing practical strategies and tips to transition from one home to the next.
If you’re ready to take the first step toward your homeownership journey, get pre-approved for your mortgage today!
How to Buy a House While Owning a House
While buying a house while owning a house presents unique challenges, we’ve outlined a few unique strategies on how to buy a house while owning another:
How to Sell Your Home and Buy at the Same Time
Buying and selling a house at the same time helps avoid managing two mortgages as you can use the equity for a down payment.
However, it presents the challenge of needing temporary housing between selling your old home and moving into your new one. Here are strategies to manage this:
- Negotiate the Closing Date: Try to align the closing dates of your sale and purchase. If this isn’t possible, negotiate a later closing date for your sale.
- Set Up a Rent-Back Agreement: Negotiate to stay in your sold home for a few months, paying rent to the new owners, or agree on a lower selling price in exchange for staying longer.
- Stay with Family or Friends: Temporarily staying with loved ones can be a cost-effective solution.
- Pay for Temporary Housing: Rent an apartment, condo, or extended-stay hotel if needed, though this can be costly.
- Use Portable Storage Containers: Store your belongings in portable storage containers until you move into your new home.
How to Rent Your Home and Buy
Renting out your home while you look to buy may be a good option for some homeowners; it may not make sense for other homeowners. Here’s a comprehensive guide to help you navigate this process:
1 - Understand the Lending Rules
Lenders may have specific requirements when you turn your primary residence into a rental property.
Here are some common lending rules you may encounter before being able to rent out your primary residence:
- Owner-Occupancy Requirement: Some loans, particularly FHA and VA loans, require you to occupy the home as your primary residence for a certain time frame before you can rent it out.
- Rental Income Consideration: If you plan to use potential rental income to qualify for a new mortgage, lenders will usually require verification of a signed lease agreement and proof of the security deposit.
- Tax Implications: Changing your primary residence to a rental property can have significant tax implications. It’s best to talk with a tax advisor to better understand how rental income and expenses will affect your tax situation.
- Equity Requirements: Some lenders may require you to have a certain amount of equity in your current home before you can convert it to a rental property.
2 - Review Your Mortgage Agreement
Check the fine print of your existing mortgage to ensure it allows renting out the property. If not, consider refinancing with a rental-friendly lender.
3 - Consult Your Homeowners Insurance Agent
Standard homeowners insurance won’t cover rental-related issues. You’ll need landlord insurance, which typically costs 15% to 20% more than homeowners insurance. This covers property damage, loss of rental income, and liability protection.
4 - Screen Potential Tenants
Ensure you find reliable tenants by:
- Reviewing Applications: Check for solid rental history, no evictions or criminal records, and sufficient income.
- Understanding Local Laws: Be familiar with landlord-tenant laws and anti-discrimination regulations to avoid any legal pitfalls.
5 - Sign a Lease Agreement
Once you’ve found a tenant that meets your requirements, create a comprehensive lease agreement detailing rent amount, due dates, terms of the tenancy and any other items that’ll protect you from any legal challenges. Have your tenant sign this document to formalize the arrangement.
How to Buy a Home First and Then Sell My Existing Home
Here are some strategies for buying a new home before selling your current one:
Step 1 - Assess Your Financial Situation
The first step is to ensure you can handle the financial requirements of owning two homes for a period.
This includes managing two mortgages, covering closing costs, and handling any necessary repairs on the new home before you can sell your old one.
Have a cushion of three to six months' worth of living expenses, including mortgage payments for both properties, to cover unexpected costs.
Step 2 - Secure Financing Options
Here are places you can get finances for buying your new home:
- Home Equity Line of Credit (HELOC)*: If you have enough equity, a HELOC can provide funds for a down payment on your new home. Keep in mind that you’ll likely need to secure the HELOC before listing your home.
- Bridge Loan: This short-term loan lets you borrow against your current home’s value to fund your new home’s down payment. Bridge loans typically have higher interest rates but are designed for quick repayment.
- 401(k) Loan: Borrowing against your retirement account can provide necessary funds without impacting your debt-to-income ratio. Ensure you repay this loan promptly to avoid penalties.
- Low-Down-Payment Mortgage: Opt for a mortgage with a low down payment and recast it after your current home sells to lower your monthly payments.
Step 3 - Negotiate Contract Contingencies
- Sales Contingency: This allows you to back out of the purchase if your current home doesn’t sell by a specified date. However, sellers may be hesitant to accept this type of contingency, especially in competitive markets.
- Right of First Refusal: In a competitive market, negotiate a right of first refusal, which gives you 24 hours to decide if another offer comes in on your new home. This can provide some flexibility without completely losing your earnest money.
Step 4 - Explore Savings Options
If other financing options are not feasible, consider using your savings or investments to cover the costs temporarily.
- Tapping into Savings: Using emergency funds or other savings can be a quick solution, but ensure you plan to replenish these funds once your current home sells.
- Retirement Accounts: As a last resort, you might consider a loan from your 401(k) or other retirement accounts. There may be potential penalties and keep in mind the importance of repaying these funds promptly to avoid long-term financial impacts.
Step 5 - Check out Our Powerbid Program
Our PowerBid program makes the home buying process easier by providing full underwriting credit approval, helping you compete with cash buyers and offering renewable approvals lasting up to 90 days.
This is a good option if you’d like to buy your new home quickly and need a strong offer.
What Are the Steps to Sell My Home?
Here are the essential steps to selling your home:
1 - Assess the Market
Evaluate the housing market conditions for both your current home and the area where you plan to buy. Consider factors like school districts, crime rates, and local amenities that could affect your home's value
Understanding whether it's a buyer’s or seller’s market will help you set realistic expectations for your sale and purchase.
An agent can provide insights into market conditions and help you decide the best time to sell.
2 - Decide the Right Time to Sell
Late spring and summer are typically the best times to sell, as families prefer moving during these months. Winter might be slower, especially in regions with harsh weather. Ensure you’re personally ready to move, both emotionally and logistically.
3 - Prepare Your Home
Getting your home ready for sale involves making it as attractive as possible to potential buyers.
- Declutter and Clean: Remove unnecessary items and deep clean your home. This makes it look more spacious and inviting.
- Make Cosmetic Updates: Repair any damage, apply a fresh coat of paint, and update fixtures to improve the home's appeal.
- Stage Your Home: Work with your real estate agent to stage your home for showings and photographs.
4 - List Your Home with a Real Estate Agent
Partnering with a professional can make a significant difference in the selling process.
Here’s how a real estate agent can help:
- Price Your Home Correctly: Real estate agents help make sure your home is priced to sell quickly without undervaluing it.
- Coordinate Transactions: Align closing dates and negotiate terms to fix your needs.
- Navigate the Market: You can lean on their expertise to manage the sale and purchase smoothly.
5 - Show Your Home
Once your home is listed, be prepared for showings and negotiations.
- Showings and Open Houses: Your agent will coordinate these and gather feedback from potential buyers.
- Reviewing Offers: Consider all offers with your agent, taking into account the price, contingencies, and buyer’s financial strength.
- Negotiations: Be prepared to negotiate terms such as closing date, repairs, and contingencies.
6 - Close the Sale
After accepting an offer, you'll need to complete several steps to finalize the sale.
- Home Inspection: The buyer will likely schedule an inspection. Be ready to address any issues that arise.
- Appraisal: An appraisal ensures the home’s value matches the agreed-upon price.
- Closing: Sign all necessary documents to transfer ownership of the property. Once closed, you’ll receive the proceeds from the sale.
7 - Move Out
Plan your move to ensure a smooth transition to your new home.
- Schedule Movers: Book a moving company well in advance to secure your preferred date.
- Coordinate with Your Buyer: Ensure a smooth handover of keys and any necessary information about the home.
How Can I Get Pre-approved for a New Mortgage?
At Rate, we understand the complexities of buying a house and selling a house. We offer a wide range of products and services designed to help you through every step of the process.
Our Mortgage Payment Calculator helps you estimate future mortgage payments, taking into account various factors such as:
- Home price
- Down payment
- Interest rate
- Loan term
- Property taxes
- Insurance
- HOA fees
Knowing these details upfront allows you to find a home that fits your budget comfortably.
Next, our user-friendly digital platform makes it easy to start your mortgage application.
Simply provide your property info, personal details, income, assets, and credit scores, and our system will guide you through the process. This efficient approach saves you time and reduces stress, allowing you to focus on finding your dream home.
Buying a House FAQs
What are the tax implications when you buy and sell a house?**
When you sell your home, you may be subject to capital gains tax if your profit exceeds the IRS exclusion limit of $250,000 for single filers or $500,000 for married couples filing jointly. To qualify for this exclusion, you must have owned and lived in the home for at least two of the five years preceding the sale. Additionally, certain home improvements can increase your home's cost basis, potentially reducing your taxable gain.
Can I buy a new home if I have a low credit score?***
Yes, it is possible to buy a new home with a low credit score, but it may limit your financing options and result in higher interest rates. To improve your chances, consider FHA loans, which are designed for borrowers with lower credit scores. You may also work on improving your credit score before applying for a mortgage by paying down debts, disputing any inaccuracies on your credit report, and avoiding new credit inquiries.
What should I consider when choosing between a fixed-rate and an adjustable-rate mortgage (ARM)?
A fixed-rate mortgage offers stable monthly payments and is ideal if you plan to stay in your home for a long time. An adjustable-rate mortgage typically starts with a lower interest rate that can change over time, which can be beneficial if you plan to sell or refinance before the rate adjusts. Consider your long-term plans, current market conditions, and risk tolerance when choosing between these options.
* Rate, Inc. home equity line of credit (HELOC) is an open-end product where the full loan amount (minus the origination fee) will be 100% drawn at the time of origination. The initial amount funded at origination will be based on a fixed rate; however, this product contains an additional draw feature. As the borrower repays the balance on the line, the borrower may make additional draws during the draw period. If the borrower elects to make an additional draw, the interest rate for that draw will be set as of the date of the draw and will be based on an Index, which is the Prime Rate published in the Wall Street Journal for the calendar month preceding the date of the additional draw, plus a fixed margin. Accordingly, the fixed rate for any additional draw may be higher than the fixed rate for the initial draw. This product is currently not offered in the states of New York, Kentucky, West Virginia, Delaware and Maryland. The HELOC requires you to pledge your home as collateral, and you could lose your home if you fail to repay. Borrowers must meet minimum lender requirements in order to be eligible for financing. Available for primary, second homes and investment properties only. Dependent on minimum credit score and debt-to-income requirements. Occupancy status, lien position and credit score are all factors to determine your rate and max available loan amount. Not all applicants will be approved. Applicants subject to credit and underwriting approval. Contact Rate for more information and to discuss your individual circumstances. Restrictions Apply.
** Rate, Inc. does not provide tax advice. The consumer should always consult a tax advisor for information regarding the deductibility of interest and other charges in their particular situation.
*** Rate, Inc. does not provide credit counseling or credit repair services.