Can You Get a New Mortgage Before Selling Your Current House?

Many homeowners want to buy their next property before selling their current one. Moving from one house to another is easier if you already have a place to move to. It’s also easier to identify which items you want to take and which ones you won’t need if you already know what your future house looks like. 

However, getting a mortgage for your next home can be challenging. Lenders have strict requirements for carrying two mortgages simultaneously and you may be taking a risk by estimating your home sale profits. 

This guide will cover key requirements to secure your next mortgage along with alternative financing options. This way you can make informed decisions about your pending home sale and upcoming home purchase. Here’s how you can protect yourself while also increasing your chances of a smooth move.

Juggling Two Mortgages Depends on Your Finances

Many lenders are aware that current homeowners want to buy their next house before they move. When you start househunting and applying for mortgages, they will know that you are shopping for your next primary residence, not a vacation home or investment property.

However, they still need to do their due diligence to confirm that you can afford the new mortgage while also paying your current one. Here are a few things they will look at. 

• Debt-to-Income Ratio (DTI): Most lenders require a DTI below 43%, which means buyers must show they can afford both mortgages. Even if you only intend to take on two monthly mortgage payments at a time for a few months, lenders will calculate your DTI. Look at your gross monthly income and see what your maximum mortgage payments could be.   
• Credit Score Requirements: A strong credit score (typically above 700) improves your chances of approval. This shows that you are safe to lend to. 
• Income Stability: Lenders want proof of steady income that can support two mortgage payments. If you are changing cities or states, they might also need proof that your employer knows about the move and will let you stay in your role – especially if you are working remotely. 
• Home Equity: More equity in your current home can help with loan qualification and assist you in securing a down payment on the new home.

Several moving pieces contribute to your mortgage application. If you are strong in some areas but weaker in others (like having a low credit score) your lender might work with you to identify potential solutions and diverse options.

Challenges of Getting a Mortgage Before Selling

Once you get over the hurdle of wondering whether you qualify for a second mortgage, the next step is to identify whether this option is right for you.

The benefits of buying your next house before selling yours are clear: you can move directly from one property to the next without needing storage units or temporary housing. This creates a lower-stress move. However, you need to confirm that the stress reduction of having a house is worth the financial risk of two monthly payments.

• You take on higher monthly payments: Managing two mortgages can be financially straining, even if it falls within your debt-to-income ratio. The extra cost could affect your ability to cover other unplanned expenses. 
• There’s a risk of your house not selling quickly: If your current home takes longer to sell, you may be stuck with two mortgages longer than you like. 
• Your house might sell too quickly: Conversely, your house might sell before you close on your next home, putting your family in temporary housing anyway.  
• There are stricter loan requirements: Lenders may have tighter guidelines for those carrying two mortgages because there is a higher risk of defaulting on one. 
• Contingent offers may not be competitive: Sellers may prefer offers from buyers who have already sold their home instead of taking a risk on a sale contingency. 

Some of these risks are completely out of your control. You don’t know how sellers will approach your offer or how quickly buyers will bid on your current house. Even financially stable homeowners could experience stress if they choose this option.

Alternative Financing Options For Your Second Home

Taking on a second mortgage isn’t your only option if you want to buy a new house before selling your existing home. Here are a few alternatives to consider that could provide more financial stability or flexibility in your move.

Bridge Loans

A bridge loan is a short-term loan that covers the gap until your current home sells. You can secure a bridge loan that lasts up to six months or a year. The bridge loan will allow you to have a strong down payment that helps you secure favorable loan terms. When you sell your house, you will pay off the bridge loan. 

This option is ideal if you live in a seller’s market where a buyer can close on your home in a few months. The main risk is that the bridge loan expires before you sell your current property. You also want to make sure that the interest rates are comparably favorable to taking out a second mortgage.

Home Equity Line of Credit (HELOC)

A home equity loan or line of credit (HELOC) pulls the existing equity from your home and turns it into cash. Lenders will issue up to 85% of your home’s non-mortgage value in loans. This could be a way to get a significant down payment that makes securing a mortgage more realistic. 

For example, if your home’s appraised value is $500,000 and you owe $100,000 on your mortgage, then you have $400,000 in equity. This means you could take out a maximum of $340,000 as a home equity line of credit or loan. 

If you are moving from a high-cost-of-living area to a lower-cost-of-living one, you might be able to make cash offers with your HELOC. Alternatively, you can provide a much larger down payment that reduces your second mortgage application enough to be reasonable. A higher down payment also might be more appealing to sellers, increasing your chances of your offer getting accepted. 

Contingency Offers

If you don’t want to add to your existing mortgage or tap into your home equity, consider making offers with contingencies. A seller will accept your bid knowing that you cannot close until your old house is sold. 

Some sellers think contingent offers are risky. They don’t know whether your house will sell in two weeks or six months. Delays in your home sale could prevent them from moving and disrupt their own finances and plans. However, the right seller will be willing to accept your contingency and you might still find your dream home.

These offers still might require you to find short-term housing or storage for your belongings. Even a few days between one closing and the next can be uncomfortable. They also require your lender to be flexible with your closing date as you sell one house and secure financing for the next.

Renting Out the Current Home

Another option to keep your existing mortgage is to rent out your current home. You can rent it as a furnished property or move your belongings into storage where your next house will be. 

This option will generate income that can help you pay both mortgages; however, it comes with multiple drawbacks. First, you need somewhere to stay. The rent from your house might only cover your rental costs. Also, being a landlord isn’t easy. You need to collect rental income while ensuring your tenants keep the house in good condition. Your tenants will also need to be aware that you are trying to sell the house, which means they can’t stay for long and need to be prepared for showings. 

This could also be a costly option because you are still responsible for repairs on your old home. If you move out but the HVAC system breaks or a tree falls and causes damage, you need to pay for those issues. 

Using Savings for Down Payment

You can also tap into your current savings and emergency funds to get a down payment. The higher the down payment, the lower your new mortgage will be. This is because you will have a smaller loan balance that is spread across the same number of monthly payments. 

Depleting your savings is a stressful prospect, and some mortgage lenders won’t let you do it, but the goal is to replenish it once you sell your other house. For example, if you pull together $50,000 for a down payment and then have $200,000 in profits on your home sale, you can pay yourself back that $50,000 and put $150,000 toward the new house. 

The main risks of this come from unplanned expenses. During the period between buying a new house and selling your old one, you won’t have cash on hand to cover unexpected costs.

Should You Buy a New House Before Selling Your Current One?

Every homeowner is unique when it comes to their finances, risk tolerance, and moving goals. While you might feel financially confident in taking on a second mortgage, the local real estate market might make you rethink your plans.

Here are a few pros and cons to consider when deciding to buy a house before selling your existing one. 

Pros

• There’s more time to find the right home: You can avoid rushed decisions because you are stuck in short-term housing or have to find a home quickly. With this option, you can spend months finding your dream home before you list your current one. 
• You don’t need short-term housing: This option eliminates the hassle of moving into short-term housing and potentially putting your belongings in storage. You can also eliminate the costs associated with this option. 
• The transition is easier: Taking on another mortgage allows for a smoother move without a tight deadline. You might even be able to remodel, paint, replace the flooring, or make repairs before moving.

Cons

• There is added financial strain: Carrying a second mortgage from the new house can be risky if the current home doesn’t sell fast. Consider how long you can handle two mortgages. 
• There are additional market risks: Home values could drop, making it harder to sell at the expected price. This can affect the expected down payment on your next house. Changes in the market could also delay the home sale. 
• Interest rates can change: You always risk locking in a higher interest rate. Rates could drop between your closing date and when you sell your current home. 
• Your loan could be denied: Some lenders may not approve a second mortgage until the existing home is sold.
• You may temporarily lose your nest egg: If you use your savings as your down payment, you might not have cash on hand to cover emergency costs.

Is this the Right Move for You?

One of the great things about real estate is that you almost always have multiple options to work with. If buying a new house and taking on a second mortgage isn’t possible, there are opportunities to take out home equity loans or work with mortgage lenders on creative solutions. At the very least, you can start making offers with a contingency that your old house has to sell. 

Consider all of your options and identify the best one based on your current situation, market, and finances. Even simple moves can be stressful, some brainstorming different solutions can help you make the best possible plan. 

If you aren’t sure what to do or have questions about your options, contact a local real estate agent. An experienced Realtor can help you learn about the market and review your choices. They might come up with solutions you hadn’t thought of yet. 

FastExpert is a great resource for finding qualified real estate agents to assist with buying and selling. Start here and meet with agents in your desired area. The right agent can be an asset from the first meeting to the closing date.