How to Use Your House to Buy Another House

Homeowners often aim to use their current property to acquire a new residence. This involves understanding financial strategies to unlock the value in an existing home. Several methods exist for utilizing an existing home to facilitate the purchase of another.

Selling Your Current Home Before Buying

Selling your current home before buying a new one provides a clear financial position and avoids managing two mortgages. This approach allows you to access full equity from your existing property, which can fund a substantial down payment or even the entire purchase of your next home. Before listing, assess current real estate market conditions, including average days on market and sales prices for comparable properties, to set realistic expectations.

Preparing a home for sale involves decluttering, making necessary repairs, and staging to enhance its appeal. After preparation, the home is listed, followed by showings and offer negotiations. Upon accepting an offer, the transaction proceeds to closing, where ownership transfers and sale proceeds are disbursed.

After the sale, homeowners often need temporary housing, such as a short-term rental or staying with family, while searching for and closing on a new property. This temporary relocation requires moving belongings twice. However, having cash from the sale provides significant leverage in a competitive buying market, allowing for a stronger offer without a financing contingency.

Sale proceeds, after accounting for any outstanding mortgage balance, real estate commissions, and closing costs, become immediately available. Seller closing costs range from 1% to 3% of the sale price, covering transfer taxes, attorney fees, and title insurance. Accessible funds simplify new home financing, reducing or eliminating the need for a new mortgage and potentially saving on interest and loan origination fees.

Utilizing Your Home Equity

Home equity is the portion of your home you own outright, calculated as its current market value minus any outstanding mortgage. Leveraging this equity can provide significant funds for a new home purchase without selling your current property. Several financial products allow homeowners to access this value, each with distinct characteristics for fund disbursement, repayment, and qualification.

Home Equity Line of Credit (HELOC)

A Home Equity Line of Credit (HELOC) functions like a revolving credit line, allowing you to borrow funds as needed up to a predetermined limit, often for a 10-year draw period. Interest is paid only on the amount borrowed, and the line can be repaid and re-borrowed multiple times during the draw period, offering flexibility. Lenders require a strong credit score, above 680, and a combined loan-to-value (CLTV) ratio, including the existing mortgage and new HELOC, not exceeding 85%.

The HELOC application process involves an initial inquiry, formal application, home appraisal, and underwriting review. Funds are disbursed as you draw from the line of credit, and closing can take two weeks to over a month. These funds can be used for a new home down payment, with repayment shifting to principal and interest payments after the draw period.

Cash-out Refinance

A Cash-out Refinance replaces your existing mortgage with a new, larger one, allowing you to take out the difference in cash. This option results in a new interest rate and repayment term for the entire loan. Qualification requires a credit score of 620 or higher and a loan-to-value (LTV) ratio of 80% or less, meaning you retain at least 20% equity after the refinance.

A cash-out refinance application is similar to a traditional mortgage, including a detailed application, income and asset verification, home appraisal, and underwriting. Closing takes 30 to 45 days, with funds disbursed as a lump sum upon closing. These proceeds can be applied to a new property’s down payment or purchase, but consider the new, potentially higher, mortgage payment on your existing home.

Home Equity Loan

A Home Equity Loan, unlike a HELOC, provides a lump sum upfront, repaid over a fixed term with a fixed interest rate. This option offers predictable monthly payments, simplifying budgeting compared to a HELOC’s variable rate and payment structure. Borrowers need a credit score above 620 and an LTV or CLTV not exceeding 85%.

The application and approval process for a home equity loan mirrors other secured loans, requiring financial documentation, a home appraisal, and an underwriting review. Once approved, funds are provided as a single disbursement at closing, typically within two to four weeks. This lump sum can effectively secure a new home down payment, offering immediate capital with a clear repayment schedule.

Converting Your Home to an Investment Property

Converting your current home into an investment property allows you to retain ownership while generating rental income. This can significantly enhance your financial position for purchasing a new home. This strategy demonstrates to lenders that potential rental income can offset debt obligations, improving your debt-to-income (DTI) ratio for a new mortgage application. Lenders consider a portion of projected rental income, typically 75%, to account for potential vacancies and maintenance.

To assess viability, research market rental rates for comparable properties in your area, including recently rented homes with similar features. Understanding landlord responsibilities, such as property maintenance, tenant screening, and legal obligations, is also a necessary step. Financial viability depends on whether projected rental income covers the existing mortgage payment, property taxes, insurance, and anticipated operating expenses.

When applying for a new mortgage with the intent to convert your previous residence into a rental, lenders require specific documentation to factor in rental income. This includes a Uniform Residential Appraisal Report (URAR) with a rent schedule, providing an appraiser’s opinion of the property’s market rent. A signed lease agreement may also be required if a tenant is already in place.

The mortgage qualification process for your new home incorporates this documented rental income into your DTI calculation. For example, if your new mortgage payment combined with other debts would exceed DTI limits, additional rental income can bring your ratio into an acceptable range, often below 43% for conventional loans. Once approved, prepare the property for tenants, which may involve minor repairs or cosmetic updates. Finding reliable tenants involves marketing, screening applicants through background and credit checks, and drafting a comprehensive lease agreement.

Securing Bridge Financing

Bridge financing is a short-term financial solution designed to bridge the gap between buying a new home and selling an existing one. This loan provides immediate capital, allowing you to purchase a new property without waiting for your current home to sell, useful in competitive housing markets. A bridge loan is secured by the equity in your existing home and repaid from its sale proceeds.

A bridge loan involves borrowing against your current property’s equity to cover the down payment or full purchase price of your new home. For instance, if you have substantial equity, a lender might offer a loan covering up to 80% of its value, minus the outstanding mortgage. Qualification requires significant equity, a strong credit score, and verifiable income to demonstrate repayment capability, though the primary repayment source is the future home sale.

The application process for a bridge loan involves submitting an application, providing financial documentation, and undergoing an appraisal of your current property. Once approved, funds are disbursed as a lump sum, usable immediately for your new home purchase. Bridge loans are temporary, with terms ranging from six months to one year, and carry higher interest rates than traditional mortgages, reflecting their short-term, higher-risk nature.

Repayment of the bridge loan occurs when your existing home sells. Proceeds from that sale pay off the bridge loan, including principal, accumulated interest, and associated fees. While bridge loans offer flexibility for simultaneous purchase, they also come with fees like origination fees (0.5% to 3% of the loan amount) and closing costs, making them a more expensive borrowing option.