How to Buy a Second Home Without Selling the First Home (2024)

Today, there’s a shift in homeownership trends. An increasing number of individuals are buying their second home and converting their primary residence into a rental property. If you too are wondering whether to purchase a new home before or without selling your current one, this blog is tailored for you. Join us as we guide you on how to buy a second home without selling the first. What’s more, you can explore the pros and cons of waiting it out to get the best deal for your house.

We do understand that every homeowner wanting to sell their house would ideally want the house sale to coincide with the acquisition of a new one in a bid to save on the capital gain tax. However, real estate transaction timings may not synchronize precisely.Sometimes, you may have to buy a piece of property before you sell one.

What are the advantages of buying a home before selling the first one?

Opting to buy a new home before selling your current one comes with a set of potential advantages:

• You can move seamlessly from your old home to the new one without the need for temporary housing or storage.
• You can undertake renovations or improvements in the new home before moving in, avoiding the inconvenience of living in a construction zone.
• Being a non-contingent buyer (not relying on the sale of your current home) may give you stronger negotiating power and a competitive edge when making an offer on your new home.
• You can choose an opportune time to sell your existing home, potentially maximizing its sale price in a seller’s market.
• You won’t be under as much pressure to sell quickly, allowing you to wait for the right buyer and a favorable selling price.
• And, there’s no pressure to wait to buy your dream home. While the real estate market has seen a cooling off in the past couple of years, the inventory remains limited. If you come across your ideal home, you can avoid the delay of waiting to sell your primary residence.
• You don’t have to live in the house while organizing open houses and private showings.

What are the drawbacks of buying a second home without selling the first one?

• There can be a financial crunch when it comes to buying another house before selling the current one. Typically, individuals utilize the proceeds from their current home to buy a new one, using some of the cash for a down payment at the very least. Unless you have substantial savings or investments that can be easily liquidated, purchasing a home before selling yours may require careful consideration of how to finance it.
• Financing two homes means dealing with additional interest payments and possibly higher loan fees.
• Managing two mortgages simultaneously can strain your finances, potentially leading to increased debt or financial stress.
• Owning two properties means dealing with the ongoing costs of maintenance, property taxes, insurance, and possibly homeowner association fees for both homes.
• The real estate market is unpredictable, and if it takes longer than expected to sell your first home, you may find yourself in a less favorable market condition when you eventually sell.
• If you’re not planning to rent out your first home, it may sit vacant, which can pose security and maintenance challenges.

How to buy a second home without selling the first?

Acquiring a new home before selling your existing one requires a careful balance. Here are some potential steps to navigate this process:

Check your eligibility for a second mortgage

Securing financing for a second home can be challenging. To qualify for a mortgage on a second home, you must satisfy Debt-to-Income (DTI) requirements. DTI compares the amount of debt you carry to your income. You can calculate your DTI by adding up your monthly debts and dividing by your pre-tax monthly salary.

Typically, loan lenders mandate a DTI of 43% or lower to grant approval for a second mortgage. Of course, the better your credit score, the better your chances of securing a mortgage.

You should explore lenders, assess options, and consider obtaining preapproval to determine the loan size you qualify for. Typically, a down payment of 3 to 20 percent is required.

Include a sales contingency in your real estate contract

Introduce a sales contingency into your sale and purchase agreement to signify that the purchase of your new home depends on the sale of your old one.

Explore the option of bridge loans

Bridge loans cover the interim period between buying a new home and selling the old one until permanent financing is secured. Note that these loans often have short terms and slightly higher interest rates compared to a first mortgage loan.

Consider HELOC/Home equity loans

You could explore obtaining a HELOC or home equity line of credit or a home equity loan on your existing property. Be mindful of repaying the HELOC or home equity loan in addition to your original mortgage payment once your old home sells.

Dip into your savings

Although tapping into your retirement account is an option, it may not be advisable due to potential missed investment growth. Alternatives include 401(k) loans with interest rates slightly above the prime rate or Roth IRA withdrawals, keeping in mind the associated penalties and restrictions.

Request a delayed closing

If your home sale is imminent, propose a delayed closing to the sellers of your new home. This may better synchronize the sale of your old home with the purchase of the new one. Consider offering additional earnest money or covering extra closing costs to demonstrate goodwill.

What are the alternatives to buying a house before selling the first one?

Feeling wary about buying a new home before selling your current one? Here are some alternatives to consider:

Rent out your old home

Rather than immediately putting your old home up for sale, explore the option of renting it out. The rental income can help offset the expenses of your new home. If the rental property generates positive cash flow, you’ll have extra money saved each month. For instance, if a home rents for $2,500 and the mortgage is $900, you could have a positive cash flow of $350.

Moreover, while a primary residence can’t be depreciated, turning it into a rental property unlocks some tax benefits.

Real estate investment is a proven way to build cash flow and wealth. For instance, over the last decade, median home prices have increased drastically, suggesting potential appreciation. Rather than selling, many investors choose to buy and hold rental property for long-term financial growth.

Sell to a real estate brokerage

Some real estate brokerages provide a cash-for-homes service. They may guarantee to purchase your property, and in some cases, even provide funds for your new home purchase. If you buy a property within their network, it could be an added advantage. Regardless, consider engaging a knowledgeable real estate agent, especially one skilled in quick home sales or adept at representing both buyers and sellers.

Sell your home first and then buy

Opt for selling your current home before venturing into a new purchase. While this approach might mean missing out on a desirable property, it can save you the hassle of managing financing and payments on both a new loan and your existing mortgage.

How to buy a second home and rent the first?

If you’re thinking of buying a second home and renting the first one out, here’s how to go about it.

Evaluate your financial situation

Owning two homes means managing two mortgages, potentially causing financial strain. Before diving into a second home purchase, consider paying off high-interest debt, establishing a realistic budget, and creating an emergency fund. Seeking advice from a financial planner or property manager can provide insights into the costs associated with keeping the first home as a rental.

Secure funds for a second down payment

Acquiring cash for a second home down payment may pose a challenge, but there are solutions. Options include a home equity loan or home equity line of credit (HELOC) by leveraging the equity in the first home. Other sources may involve tapping into a retirement account, opting for a cash-out refinance, or seeking financial support from family and friends.

Ensure the first home is rental-worthy

Not all homes are equally lucrative as rental properties. Assess the potential financial performance by examining key return on investment (ROI) metrics, including cash flow, cash-on-cash return, net operating income, and cap rate.

Decide on rental property management

Being a landlord involves various responsibilities, such as understanding local and state landlord-tenant laws, preparing the home for rent, marketing, tenant screening, lease agreement management, rent collection, maintenance, bill payment, and periodic property inspections. Consider whether self-management or hiring a property manager suits your preferences and needs.

Establish an efficient bookkeeping system

Renting out even one home involves significant paperwork. Organize and safely store documents such as lease agreements, rent receipts, maintenance invoices, and records of landlord-tenant communications.

FAQs

What is a second home?

A second home is an additional property you buy. It’s different from your main home where you stay the most part of the year. Unlike most investment properties, there are rules from your lender about how long you must live in a second home and when you can rent it out.

What are the benefits of a second home?

You could use the property as

• A vacation home: Ideal for large families, frequent vacationers, or those wanting a personal getaway.
• Secondary residence: Suitable for those with jobs requiring travel or time spent in another city. Offers a convenient home base without the need for alternative accommodations.
• Investment property: Some use a second home for investment, either for house flipping, resale, or as a rental property.

What should be the process for buying a second home?

• Decide where to buy your second home, considering factors such as proximity to family or preferences for a beach, mountains, or city.
• Determine your financing and mortgage options. Consider conventional loans or jumbo loans if the amount is more than what is established by Fannie Mae and Freddie Mac. Note that government-backed loans such as VA and FHA loans aren’t for second homes.
• Get loan preapproval. It will help start the mortgage process early and eliminate surprises during closing.
• Hire a good real estate agent. Partner with a local agent who understands the housing market and can guide you through the homebuying journey. Once you find your dream home, the agent will help negotiate the price and make an offer.
• Close the deal. This takes about 30-40 days. You will have to factor in hiring a real estate attorney, buying homeowners and title insurance, scheduling home inspections, waiting for appraisal results, arranging a final walk-through, and finally, closing on your second home.

Here’s how to buy a second home without selling the first was last modified: March 1st, 2024 by Ramona Sinha