Buy First or Sell First?

October 6, 2003, Revised May 4, 2005, February 22, 2007, August 9, 2007 “I currently own a home which I would like to sell, and then buy another. What is the best sequence of steps in this process?”

You want to avoid is giving up your existing home before you can move into the new one. Having to find a place to live and store furniture and other effects, while waiting for the new house to become available, can be a nightmare. You also want to avoid committing on a new house using the equity in your existing house, and then finding that you can't sell. That can be an even worse nightmare.

The best sequence of steps depends on your situation.

Enough Income and Cash: In the most favorable situation, you have enough income to carry two mortgages; and enough cash to meet the cash required to purchase the new house without having to use any of the equity you have in the old one. In this case, you would buy your new house first. Once you have it under contract and the new mortgage arranged, you put your old house on the market, setting a closing date beyond the closing on the new house. That way, you can stay in your old house until you are ready to move into the new one.

Enough Income, Not Enough Cash: In a less favorable situation, you have enough income to carry two mortgages, but not enough cash to close on the new one. You need to cash-out some of the equity in your existing house. The simplest way to get it is to take out a home equity line of credit (HELOC) on that house. Then, you have the same flexibility as in the first case. You can take whatever time you need to find the house you want to buy, following which you sell the old house and pay off both mortgages.

It is a good idea to take out the HELOC well in advance of your purchase, leaving most of the line unused until you need it. Lenders don't much like writing a HELOC that will be fully repaid in a few days.

Not Enough Income or Cash: In the least favorable case, you don't have enough income to carry two mortgages, or enough cash without the equity in your current house. This means you must sell before you can buy. You can still avoid the nightmare of having no place to stay, however, if the closing date on the sale comes after the closing date on the purchase. That way, you can remain in your existing house until you move into the new one.

The new lender will disregard the old mortgage in qualifying you because you have a contract to sell the old house, which will pay it off.

The burden is on you, however, to produce an acceptable contract of sale. Most lenders will insist that the contract include a significant non-refundable deposit by the buyer, and have no escapes for the buyer such as a mortgage contingency clause.

An unconditional contract of sale also will allow you to cash out some of the equity you have in your existing house with a short-term loan from a bank, called a “bridge loan”. The loan bridges the period between the closing on your new house purchase, and the closing on your existing home sale. The bridge loan is repaid when you sell. See Buying a New House Before Selling the Old One.