How Can You Buy Another House Before You Sell Your Current House?

Moving from one house to another house can be a complicated process. Timing each transaction so that you're not paying two mortgages is tricky. Many people don't want to purchase a new house until they are sure that their old house will sell. But what happens if you find your dream house before your old home has sold? With some thoughtful planning, you can achieve your real estate goals even if your home has not yet sold. With these tips, you may find real estate buying and selling easier to navigate than you thought.

Maintain Your Emergency Fund

As always, keep an emergency fund that has enough funds to cover three to six months of expenses. If you see a move on your horizon, it's important to add to your reserves. Gone are the days when a mortgage company would give you a bridge loan to purchase a new house before your old one is sold. You'll want to beef up your savings to ensure that your bills will be covered, allowing you to focus on your real estate goals.

Home Equity Line of Credit

We generally recommend that clients get a home equity line of credit as soon as they purchase a house. That way, if they get into financial difficulty, they will have some financial flexibility. Banks will simply not extend a home line of credit if the individual doesn't have income. However, if you already have a home equity line of credit prior to a loss in income, you can borrow against it in order to put the down payment on your new home. Doing this gives buyers some flexibility.

Leverage Your Brokerage Account

If your current home is paid off, mortgage brokers may be reluctant to give you a mortgage if you plan to sell your house within six months because they'll be required to return their commission. If there are large tax consequences, you can sell your brokerage account to put down your down payment. If you don't have enough physical cash for a down payment for your new home, brokerage firms can lend 60-70% of the value of your account at very reasonable rates; and you can use this for your down payment.

Use Your IRA as a Last Resort

As a last resort, you can take money out of your IRA to use for your down payment. This should only be an option as long as you can return the funds within 60 days. It is a high-risk strategy because if you fail to put the money back, the whole distribution is taxable at ordinary income rates, and you may be subject to a 10% penalty if you are less than 59 years and 6 months old. Another downside to this option is that the money will be removed from the market while you are selling your house and waiting for the opportunity to redeposit the money, so it will not grow.

Logistics

Logistics are another tricky issue if you sell your current house quickly but haven't purchased a new one yet. You won't want to be without a house for an extended period, because it can be consequential for you or your family and pets in any number of ways. One option is to include a contingency clause in your contract that states that the new house is contingent on the sale of the current house. You can also sell your house and lease the new home from the buyers for a period of time if they agree.

Family Members

If possible, you could see if you could get a short-term loan from a willing family member. Naturally, family dynamics and your family's financial capability will impact this option. Make sure that you have a formal loan agreement and a reasonable interest rate. Keep in mind there are rules based on the loan length and lowest interest rate. You can find the lowest applicable federal rate you can pay depending on the loan length by clicking here.https://apps.irs.gov/app/picklist/list/federalRates.html. Make sure an attorney draws up the paperwork for this loan.

Rental Properties

If you have rental properties, there is the possibility of refinancing a property and using the cash on a temporary basis. You'll want to compare the pros and cons of this option with other ideas outlined here so you can choose the best solution for your circumstances.

As with any and all financial decisions, we recommend you talk to your current financial advisor to review and assess each scenario. Gaining professional advice before acting can help you avoid possible pitfalls as you navigate your buying and selling transactions.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail  info@diversifiedassetmanagement.com