There may come a point when you decide you’re ready to buy a new home. Maybe you purchased a starter home initially and are now looking to upsize. Or maybe you want to move to a different neighborhood now that your kids are old enough to attend public school.
If you have equity in your current home, you may be relying on it to come up with a down payment on a new home. For example, let’s say the market value of your home is $300,000 and you only owe $150,000 on your mortgage. That means you have $150,000 in equity.
If you’re trying to upgrade to a $750,000 home, you might want to put down $150,000, or 20%, to avoid private mortgage insurance, a costly premium designed to protect mortgage lenders. So if you buy a home before your home sells, you may not have the down payment you need on hand. Also, at that point you’ll have two monthly mortgage payments to cover, which could be a scary thing financially.
It’s pretty common for people to make an offer on a new home before their current home has sold. But you should know that making an offer that’s contingent on your home selling could put you at risk of having your offer rejected.
When your seller takes on added risk
Many people have a lot of their money tied up in their homes. So it’s easy to see why you might need your home to sell before you go through with a new home purchase.
In that situation, it’s common to make an offer with a clause stating that said offer is contingent on your home selling. That way, you don’t run the risk of having to cover payments on two mortgages. And you’re more likely to end up in a situation where you can use the proceeds from the sale of your current home to cover your down payment for your new home.
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In a housing market where buyer demand isn’t so strong, that sort of offer might fly with a seller. But in today’s market, you may be more likely to have an offer like that rejected.
As of July, there was only a 3.3-month supply of homes on the real estate market, according to the National Association of Realtors. But it can easily take a six-month supply of homes to meet buyer demand.
Because there are more buyers than available homes right now, sellers can afford to be more picky with regard to the offers they accept. So a seller may not agree to an offer that’s contingent on your home selling.
Other options to consider
From a financial standpoint, you might assume that you can’t buy a new home until your current one sells. But you should know that you may be able to qualify for a bridge loan, which is a short-term loan you take out so you can put money down on a new home if your current home hasn’t yet sold.
The downside of going this route is that bridge loans can be costly from an interest rate perspective. And you might face different fees for putting one in place. But it is an option you can look at if you want to make an offer on a new home that isn’t contingent on your current home selling.
Of course, signing a bridge loan won’t eliminate the risk of having your current home sit on the market for months once you’ve closed on your new home, leaving you to cover two mortgages at once. But given that housing inventory is so low right now, if you price your current home fairly, there’s a good chance it won’t sit for too long provided it’s in reasonable shape.
All told, many people make offers to buy a new home before selling their current one. But you’ll need to be prepared to have your offer rejected if you adopt a similar strategy. Making an offer above asking price could, however, sway a seller to work with you, even if that means taking on the risk of a home sale contingency.