Updated By Richard Barrington
In many aspects of life, timing is everything. Buying a house before selling your existing residence can provide you with an all-too-clear demonstration of this reality.
Rest assured though -- while making an offer on a house before selling yours can get tricky, it is also pretty common. Experienced real estate agents and mortgage loan officers should be very familiar with the process and able to guide you through it. A good starting point is knowing what your options are, because there are a few ways to approach it.
Selling and buying a house at the same time
Perhaps you're relocating for a job opportunity, upgrading from a starter house, or downsizing after your kids leave the nest. Whatever the reason for moving, the decision you're faced with quickly turns into kind of a chicken-or-the-egg dilemma: do you put your house on the market before finding your new home, or do you get something lined up before you sell your current property?
Chances are, house hunting and putting your home on the market may overlap to some degree, and you might even find yourself in the position of making an offer on a house before selling yours. If so, there are a few ways you can approach it.
- Pick your closing dates carefully. If you have a fairly standard property in a high-demand real estate market, you may just get lucky. You might be able to get a firm offer and set a closing date that is within the window before you have to make a financial commitment to your new purchase. Unfortunately, there is a lot that can go wrong during the closing process, and not all properties can be quickly sold like commodities.
- Apply for FHA eligibility rule exception. FHA mortgage loans generally have the most generous credit standards, but they also have rules restricting you from qualifying for a new FHA mortgage while you have an existing FHA loan. However, if an FHA loan offers your best chance at qualifying from a credit standpoint, you may have some leeway. FHA eligibility rules allow you to qualify for a new mortgage loan if you are relocating more than 100 miles from your existing property for work reasons, if you can demonstrate that the current property no longer meets your needs due to growth in your family, or if you're moving from a property you own jointly with a co-borrower who will remain in the property.
- Try to meet conventional mortgage loan debt-to-income requirements. If you can't meet FHA eligibility rules, or if your credit is good enough for you to get a less expensive conventional loan, the most important obstacle you face might be the debt-to-income requirement. This limits the amount your total debt payments can represent as a percentage of your income. In most cases the maximum debt-to-income ratio for conventional loans is 45 percent, and it may be lower if you don't have a very strong credit history. Unless you have a high income, it can be difficult to keep your debt-to-income ratio below the limit if you take on an additional mortgage, even if it's only until you sell your existing house.
- Lease back your home. If you can find a buyer who isn't in a huge hurry to move into your existing home, you can try to negotiate a lease agreement that allows you to stay in the property while you wait to close on your new home. However, be sure the lease terms don't tie you up for too long, or you could find yourself making lease payments in addition to mortgage payments on your new home. Also, this kind of provision isn't going to be attractive to everyone so it could limit the pool of potential buyers.
- Make a contingent offer. Perhaps the most common -- and least complicated -- way of buying a house before selling your existing one is to make a contingent offer. This as an agreement that specifies that the offer on the new house is only binding if you're able to sell your existing home. It can allow you to line up a new home without taking on two mortgages at once, but contingent offers have some elements you should know about before you make one.
How to buy a house contingent on selling yours
Making an offer that you execute only if you're able to sell your home may seem like the best of all possible worlds, but there are likely to be some catches:
- Time limits. The seller isn't going to wait forever for you to make good on your offer and a contingent offer on a house should specify a time limit, usually around 60 days. While this can buy you some extra time, you may still be fighting the calendar as you work to sell you existing home.
- Kick-out clauses. A contingent agreement may include a kick-out clause which can shorten the time period considerably. A kick-out clause can require you to commit to your offer within 72 hours, or else the home seller becomes free to accept a competing offer.
- Competitive impact. Speaking of competing offers, be advised that home sellers are likely to view contingent offers as less attractive than those with no strings attached. So, all things being equal in terms of the amount of the offer and credit qualifications, a would-be buyer making a contingent offer is likely to lose out if the seller also has an offer on the table from someone who is ready to fully commit.
Selling and buying a house at the same time may be complicated, but it can be easier if you deal with professionals who are familiar enough with the process to guide you through which approach is best suited to your situation.
As seller, it also helps if you are prepared to do everything you can to make sure your property sells and closes quickly, because unless you have substantial financial resources to carry two mortgages at once, timing is likely to be an issue to some extent.
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