Jonah Patel
Buying a new house before selling your current one can be a great way to avoid the financial strain of paying two mortgages simultaneously. However, it can be challenging as sellers might be less eager to accept your offer, especially in a competitive market. To manoeuvre this, you can include a home sale contingency in your offer, which allows you to walk away from the contract if you're unable to sell your current home by a specified date. While this may make your offer less attractive to sellers, it is not impossible, especially if you can make the deal more appealing in other ways. For instance, you can increase your earnest money deposit, typically between 1% to 3% of the purchase price, to a higher percentage to stand out among other buyers.
| Characteristics | Values |
|---|---|
| Contingency Clause | A real estate agent can add a contingency clause to the terms of the offer, protecting you from moving forward with the purchase before your current home sells. |
| Home Sale Contingency | If you're unable to sell your current home by a specified date, you can walk away from the contract and retain your earnest money. |
| Kick-Out Clause | If your home doesn't sell within a set period, the seller can accept another offer. This allows the seller to keep their home on the market while you try to sell yours. |
| Financial Security | Buying a new house before selling your current one can provide financial breathing room and peace of mind, as you avoid the strain of paying two mortgages simultaneously. |
| Reduced Risk | You won't be forced to rush into a lower-priced sale or carry two properties if your current home doesn't sell quickly. |
| Weaker Offer | Sellers often prefer non-contingent offers as they provide a faster and more certain sale, especially in a competitive market. |
| Potential Delays | Managing the sale of your current home and the purchase of a new one requires careful coordination to avoid logistical challenges and added stress. |
| Earnest Money | A good faith deposit towards the purchase of a new home, typically 1% to 3% of the purchase price, but can be increased to stand out in a competitive market. |
| Mortgage Pre-Qualification | A letter of mortgage pre-qualification shows the seller that you're serious about buying and can help your offer get accepted. |
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What You'll Learn
Include a home sale contingency in your offer
If you want to buy a new house before selling your current one, you can include a home sale contingency in your offer. This means that the transaction is contingent on the sale of your current home. If your house sells by the date specified, the contract moves forward as planned. If it doesn't, the contract is terminated, and you get your earnest money back.
A home sale contingency can be a good way to avoid the financial strain of paying two mortgages at the same time, but it can also make it harder to get your offer accepted. Sellers often prefer non-contingent offers because they provide a faster and more certain sale. In a competitive market, a seller might not even consider an offer with a contingency.
To make your offer more appealing, you could consider offering a higher purchase price, a larger earnest money deposit, or a shorter contingency period. You could also provide a rent-back option, letting the seller stay in their home for a set period after the sale, or communicate your commitment to actively market and sell your current home.
It's important to note that including a home sale contingency in your offer can add stress and make planning your move more difficult. Managing two transactions simultaneously requires careful coordination with buyers, sellers, and real estate agents. You also risk losing the new property to another buyer if your current home takes longer to sell than expected.
If you're considering including a home sale contingency in your offer, it's a good idea to consult a qualified professional and have a top agent by your side.
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Understand the risks of potential delays
Understanding the risks of potential delays is crucial when considering a house purchase with a constitutive offer. Here are some key points to consider:
Risk of Losing the Property to Another Buyer
If your current home takes longer to sell than anticipated, you risk losing the new property to another buyer. This is a significant concern, especially if the seller includes a "kick-out clause" in the contract. A kick-out clause allows the seller to accept another offer if your home doesn't sell within a specified period. This uncertainty can add stress and complicate your plans for moving.
Managing Simultaneous Transactions
Juggling the sale of your current home and the purchase of a new one requires careful coordination with buyers, sellers, and real estate agents. You'll need to balance showings, offers, inspections, and closing dates to ensure everything aligns. Without proper timing and management, you may encounter logistical challenges that further delay the process.
Seller's Preference for Non-Contingent Offers
Sellers often prefer non-contingent offers as they provide a faster and more certain sale. In a competitive market, your constitutive offer may put you at a disadvantage. Sellers may choose an offer without contingencies to avoid potential delays or complications.
Contractual Risks and Restrictions
Including a home sale contingency in your offer protects you by allowing you to walk away from the contract if your current home doesn't sell by the specified date. However, this contingency may not always be accepted by the seller, and it could make your offer less attractive. Additionally, the seller may include restrictions, such as a deadline for selling your current home, beyond which they can back out of the contract.
Financial Implications
While buying a new house before selling your current one can provide financial breathing room, it also carries financial risks. Sellers might be less inclined to accept your offer, especially if it includes a home sale contingency. In a competitive market, your offer may be less appealing compared to non-contingent offers. Additionally, there are costs associated with home buying, such as home inspections, bank fees, and appraisal fees, which can add up during delays.
Understanding these risks will help you make an informed decision and better navigate the process of purchasing a house with a constitutive offer.
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Weigh the financial benefits
When considering making an offer on a new house before your current one is sold, it is important to weigh the financial benefits of this approach. Buying a new house while waiting to sell your current one can provide financial breathing room and help you avoid the strain of paying two mortgages simultaneously. This can prevent you from depleting your savings or taking on additional loans to cover both properties.
One option to consider is a home equity line of credit (HELOC) or a bridge loan, which can provide funds to purchase the new house before selling your current one. This approach can strengthen your offer on the new house by removing the home sale contingency. However, it may also increase your financial burden if you are unable to sell your current home promptly.
Including a home sale contingency in your offer can provide financial protection. This clause allows you to walk away from the contract and retain your earnest money if you cannot sell your current home by a specified date. While this may make your offer less competitive, it can be a valuable safeguard. Earnest money, typically ranging from 1% to 3% of the purchase price, can be a significant sum, especially in a hot market where offers may be higher.
Additionally, managing the sale of your current home and the purchase of a new one simultaneously can be complex and stressful. It requires careful coordination with buyers, sellers, and real estate agents to balance showings, offers, inspections, and closing dates. Proper timing is crucial to avoid logistical challenges and potential delays.
In conclusion, while buying a new house before selling your current one can offer financial advantages, it is important to carefully consider the potential challenges and risks. Weighing the financial benefits against the potential delays, added stress, and weaker offer position will help you make an informed decision.
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Get mortgage pre-qualification
Mortgage pre-qualification is an early step in your home-buying journey. It gives you an estimate of how much you may be able to borrow for a home loan. This estimate is based on a review of your self-reported income, debts, assets, and credit score. It is important to note that pre-qualification is not a guarantee of a loan, but it provides a useful indication of the types of loans available to you and how much you may qualify for.
To get pre-qualified, you can start by using an online calculator, such as the ones provided by NerdWallet and Bank of America, to get an initial idea of what to expect. These calculators will take into account factors such as your annual income, the term of the mortgage, the interest rate, your credit score, your employment status, and your monthly debt payments.
Once you have an estimate, the next step is to speak with a lender. You can reach out to recommended lenders or use platforms like Zillow to connect with licensed lenders who have positive customer ratings. The lender will ask for basic information about your income, debts, assets, and down payment. They may also perform a "`soft`" credit inquiry, which will not affect your credit score.
After reviewing your financial information, the lender will issue a pre-qualification letter outlining the estimated home loan amount they are willing to lend. This letter can be presented to real estate agents and sellers as proof of your financial readiness. It is important to remember that your pre-qualification amount may change if your financial circumstances or the market conditions fluctuate.
While mortgage pre-qualification is a useful first step, it is followed by the more detailed pre-approval process. Pre-approval involves providing additional documentation, such as W2s, pay stubs, tax records, and proof of assets, to confirm your creditworthiness. A pre-approval letter indicates a more specific commitment from the lender to lend you a certain amount and can greatly increase your chances of having your offer selected by a seller.
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Be aware of kick-out clauses
A kick-out clause is a type of contingency in a purchase agreement. It is a condition that must be met for the sale to go through. It impacts buyers and sellers differently.
For buyers, a kick-out clause can be beneficial as it allows them to make an offer on a new home while waiting to sell their current home. This gives them time to get financing and protects them from losing their deposit if the sale falls through. However, there is a risk that the buyer will be "kicked out" if they are unable to sell their current home within the specified timeframe or if a non-contingent offer is made by another buyer.
For sellers, a kick-out clause provides flexibility and protection. It allows them to continue showing the house and marketing it to other potential buyers, even after accepting an initial offer. This helps them avoid the risk of having to re-list their home if the original buyer's financing falls through or if there are other contingencies that are not met.
The kick-out clause also specifies a time limit, usually 72 hours, for the original buyer to decide whether to proceed with the sale without the contingency or walk away from the deal. If the original buyer chooses to remove the contingency, the seller is bound to the original offer.
It's important to note that the inclusion of a kick-out clause depends on market conditions. In a seller's market, the chances of a seller accepting an offer with a home sale contingency are slim. On the other hand, in a buyer's market, contingencies may become more common and kick-out clauses may be less necessary.
Overall, a kick-out clause can be a valuable tool in real estate transactions, providing benefits to both buyers and sellers. However, it is important to carefully consider the potential risks and advantages before including one in a contract.
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Frequently asked questions
A contingency clause in an offer protects you from moving forward with the purchase of a new home before selling your current one. It can go one of three ways: 1) You find a buyer for your current home and the contract for the new home moves forward; 2) You don’t find a buyer in the specified timeframe, so the contract for the new home is voided and you get your earnest money back; 3) Another buyer makes an offer that the seller wants to accept, and the seller invokes a "kick-out clause" to end the contract.
Buying a house contingent on selling your current one can give you financial breathing room and peace of mind. You avoid the strain of paying two mortgages at the same time, reducing the risk of using up your savings or taking on additional loans. It also reduces the pressure to make hasty financial decisions.
Sellers often prefer non-contingent offers because they provide a faster and more certain sale. If multiple buyers are interested, a seller may choose an offer without contingencies to avoid potential delays or complications. Managing two transactions simultaneously can also be stressful and require careful coordination with buyers, sellers, and real estate agents.
You can strengthen your offer by increasing the amount of earnest money, which is a good-faith deposit toward the purchase of a home. In a competitive market, you may need to offer 5% or higher of the purchase price as earnest money to stand out among other buyers. You can also get pre-qualified for a home loan, which shows sellers that you're serious about buying.
