If you’re putting your property on the market, you’ll need to have a contingency plan at hand for a new home; since most people don’t sell their homes with the honest intention of becoming homeless. However, raising the necessary down payments for your new home can get tricky very quickly – especially in a very competitive market. Do you buy before selling? Or should you wait until your house is off the market before making a down payment? There are pros and cons to either option, so it’s important to weigh them all out before making a decision. This article will guide you on how to build a house before selling yours so that you can go through the process seamlessly.
Before Making Down Payments
Most people wait until they have successfully sold their old property before trying to pay for the new home. This is probably because mortgages don’t recognize your intent to sell, only the actual sale. Therefore, they will only give you a new loan once the sale, and thus the old existing debt, has been made.
If you’re waiting for the sale to be complete before getting your new home, you’ll need to make sure you have made adequate plans for:
- Short term rent: Can you stay with friends and family or do you need to budget for actual rent?
- Contingency: Will it be possible to use a contingency to bridge the time gap?
- Adjust the down payment: How much are you willing to touch out of the down payment for your new home – to help you survive your transition period?
Possible Ways To Get Down Payments
Borrow Against Your 401k
You’ll need to speak with the administrator of your plan (who’s typically the human resources coordinator) to find out if 401k loans are allowed. Learn what the interest rates are, the terms of repayment and the length of repayment plan.
Note that the IRS has a limit as to what you can borrow. It stipulates not more than 50% of your available balance or $50,000, whichever is less.
One obvious benefit of using a 401k loan is that you’ll essentially be borrowing from yourself, so your debt rating won’t be affected. Note though that taking substantial loans from your 401k can be harmful to you in the long run — especially if you’re unable to make repayments. Therefore, be sure to only borrow as much as you need.
Use Home Equity
Home equity or home equity line of credit is a great way to tap into your property’s equity before names change. It’s like taking a second mortgage on your home which you can then use to make a down payment for your new home. Interest rates are usually low and fixed with payments required monthly.
The only problem with this method is that it increases your leverage. Meaning, if you’re unable to sell the house, you risk losing it entirely if you miss your payments.
Use A Sale-Leaseback Contingency
This literally allows you, the seller, to lease some time on your old property pending on when you make the down payment on your new property. So you’ll essentially be renting your own property until you can raise the needed cash. This is usually great, particularly if neither buyer nor seller can raise cash to make down payments immediately.
Gifts
Gifts or essentially free money is also another alternative that you can use. If you’re able to get cash from friends and family to make down payments, make sure the donor consults a tax professional before handing over the money. The last thing you want is for your free money to be taxed.
Next Steps
If you’re looking for ways on how to build a house before selling yours, then you’re in luck. There are many ways to do so. Some methods include: borrowing against your 401k, use home equity, use a sale-leaseback contingency, or getting a gift. This way, you’ll be able to design and build your dream home with ease. Good luck.
