Everyone warns you that buying your first home is complicated, and they’re right. Negotiating a mortgage for the first time takes you along a steep learning curve. However, when you buy your second house, you find that a home purchase is even more complex when you don’t have cash on hand. Starting the process of buying your new home before you’ve sold your previous one usually means approaching home sellers without liquid cash for a down payment and without a clear idea of when you’ll be able to liquefy the cash in your old home. Below are a few different ways to handle this tricky situation, and the pros and cons of each.
Option 1: The contingent offer
Before listing your home, you find a target home and make an offer. In your offer, you include a clause called a sale contingency, which stipulates that the offer is withdrawn automatically if your current home does not sell in a particular period of time.
- Pros: With your home purchase lined up ahead of time, you have a shot at timing your home sale perfectly. You might be able to make the sale, make the down payment on your new mortgage and move in, all in the same month.
- Cons: The home seller may not accept your offer. As you’ll realize when you sell your own home, a contingent offer comes with a lot of uncertainty.
Option 2: The bridge loan or HELOC
You buy your target home using a short-term loan that covers the cost of the down payment and pay off the loan when your current home sells. You can do this using either a bridge loan, which is unsecured, or a home equity line of credit, which uses the equity in your current home as security.
- Pros: They’re convenient for both you and the home seller.
- Cons: Taking out more loans means dealing with more fees — not to mention lots of forms and paperwork.
Option 3: Selling first
You sell your home and move into a flexible rental while you look for a new home.
- Pros: You don’t have to worry about lining up your home sale and purchase perfectly, and you can approach sellers with cash in hand.
- Cons: You have to go through the apartment-hunting process and an extra move. Admittedly, you don’t have to find a perfect rental, but if you don’t, you’ll wind up living in a less-than-optimal rental for a few months.