You need the equity from your current house as a downpayment on your next home. So, how do you access your equity to buy your next home?
You have four options, depending on your situation:
- Purchase ‘contingent upon sale’
- Buy first and carry two mortgages
- Sell first and rent back your old house
- Use a Buy Before You Sell program
This article discusses the benefits of each option and the downsides. By the end, you’ll have a plan of how you want to access your equity to purchase your next home.
Purchase ‘contingent upon sale.’
Making an offer on a home contingent upon selling your existing home has traditionally been the most cost-effective option. While it does save you from carrying two mortgages or renting your old house from the new owner—the following two options we’ll discuss—it’s a least favorite offer to be received by sellers.
Understanding contingencies.
When purchasing a home, you have several contingencies. You’ll be contingent upon your loan’s approval, the property appraising for the purchase price, and a home inspection during the due diligence period.
These contingencies protect buyers and their earnest money deposits. If there should be significant issues with the loan, home, or value, your earnest money is protected.
Contingent upon sale is another layer of protection that details you must be able to sell your old house before purchasing this one.
Financial risks to the buyer.
If your house does not sell by the agreed-upon date, you may cancel and receive your earnest money back in full. However, you’ve likely spent $450 on an inspection and possibly up to $650 on an appraisal. Appraisers and lenders are third parties and will need to be hired again for your next purchase.
During your contingency period, while you work to sell your house, the seller has the right to continue to market the home. If a buyer makes a better offer than yours—which could be the same offer not contingent upon sale—you will have to beat it or match it by raising the purchase price or removing the contingency.
Financial risks to the seller.
The most significant risk to the seller is their time. Sellers have to take the risk that your house will sell promptly, or they have to start the process all over again.
With homeowners having more equity in their homes than ever, the need to access it for the next purchase is common.
A transaction I was involved in had four layers of buyers contingent upon sale on a listing in Summerlin — a master-planned community in Las Vegas, NV. The buyer of our listing, their buyer, their buyer’s buyer, and one more.
If any transaction broke along that chain, every seller would be out of a buyer, and every buyer would be losing the home they fell in love with. This is why sellers do not like to accept offers contingent upon sale.
The market will dictate your chance of acceptance.
In the markets of 2020 through the current 2022 market, most listings have multiple offers. The likelihood of a seller accepting a contingent upon sale offer is very slim. This leaves your potential pool of homes to those that aren’t selling fast. Often this means being in poor shape, backing a major intersection, or other undesirable features.
A great tip is to watch for homes that recently fell out of escrow and are back on the market. Sellers are often eager to get back into contract.
Buy first and carry two mortgages.
If you have savings and a low debt to income ratio, you may qualify for another mortgage to purchase your next home before selling.
This often means buyers using a low down payment loan—a 5% to 10% down payment—to refinance once the old property is sold. If you sell your old house quickly enough, you may be able to avoid paying too many double mortgages.
There will be costs associated with refinancing. Discuss with your mortgage lender if they can help give you a break.
Sell first and rent back your old house.
Your third traditional option is finding a buyer willing to let you rent your old home until you close your new one.
This means paying a daily rate to rent back your old house until you find a home you like, make a winning offer, then close on the new house and often leaving you scrambling to find the ‘right one right now’ not ‘the one.’
During initial negotiations, you’ll agree upon a fair market rate. The funds—including a deposit—will be withheld from your proceeds based on an estimated amount of typical days.
Any remaining funds will be returned to you via check.
If the buyer is using an FHA loan—a government-insured loan that’s common for first-time homebuyers—it must be owner-occupied, and therefore they cannot lease back to you.
Brokerages like First&Sold offer modern programs to help.
The example earlier—the Summerlin townhome with four layers of contingencies—inspired us to build a better way to help homeowners buy and sell. First&Sold launched Buy Before You Sell in 2020 and Trade-Up in 2022.
Sell your home first with Trade-Up.
Our Trade-Up program is simple—we’ll buy your old house off you when you buy your next home with First&Sold.
Receive a non-contingent offer, so you have the security of knowing your old house is sold. A few days before buying your new home, we’ll close on your old home freeing up the equity you need.
First&Sold collects a 6% service charge at closing, covering the commissions and closing costs when we sell it.
Since nobody wants to move in a rush, we don’t want you to either. You can take ten days after closing to move on your schedule.
Buy Before You Sell.
With First&Sold’s Buy Before You Sell Program, you search and find the perfect home, and we buy it for you. Upgrading to a strong non-contingent offer—with closing in as quick as 10-15 days—gives you the advantage you need to compete in a strong seller’s market.
After First&Sold purchases your new home, you can move right in and get settled. Since the first thirty days are rent-free, take the time you need to move. You only pay a low 0.02% daily rate for the balance of the days required.
Continue to work with your lender on your mortgage, so you’re ready for when your old home sells. Once our listing team sells the old house for top dollar, you complete your mortgage, and we transfer the deed.
We add a 1.25% homebridge fee to the initial purchase price to cover closing costs. The homebridge fee becomes part of your mortgage.
Contact First&Sold today to learn more.
In conclusion.
How can I use my equity to buy another house? First, determine what path is best for you.
The simplest option, but most challenging to accomplish financially, is to purchase your next home with a new mortgage and sell your old house after. If that’s not feasible and you’re in a seller’s market, you can sell first and negotiate a favorable rent back. If you found the home you love and need to act quickly, a program like ‘buy before you sell’ is the best option. Lastly, in a balanced or a buyers market, making an offer contingent upon the sale of your home will be your least expensive option.
While cost is often a factor in the decision-making process, peace of mind is incredibly valuable when buying a home and moving.
There will be a lot on your plate, and securing your next home and casually moving will be well worth the cost.
Good luck, and happy home hunting!
