All you need to build a house while selling yours is guts, determination, a savvy real estate agent, financing, and, well, a lot of other things, too. Check out this guide to find out everything you need to know about building and selling a house at the same time.
Homeowners choose to sell their current home and build a new one at the same time for multiple reasons. For most, the opportunity to build their dream home arises and they jump at the chance. However, that leaves selling the old home to worry about.
Building a home while selling your current home can be difficult. Not only do you have to worry about financing your next home purchase, but now you’ve got to deal with the selling your home on top of that.
Overlapping home costs, finding temporary housing, and juggling contractors and potential home buyers can be overwhelming. The whole thing takes careful planning to ensure that it goes off without a hitch.
Don’t tackle it alone. Finding an experienced agent can take the hassle out of selling your old home, and let you focus on what’s most important — building your new home. Working with a talented real estate agent will speed up your home sale and net you a large profit. Realtors know how to help get everything from showing to signing done without any headaches on your end.
Here’s what you need to know about how to build a house while selling your old one.
The Building Timeline
One of the biggest drawbacks to building a brand new home is the timeline. Like any type of construction, building a home is subject to delays and setbacks that can seem to delay your move-in date infinitely. On average it can take anywhere from three to six months to complete a new home build, though more complex designs can take significantly longer.
The first step is securing financing to purchase the land that your home will be built on. You’ll also need to estimate how much materials, labor costs, and other building expenses will set you back.
Once the preparation has been completed and the ground is broken on your home’s construction site, you should keep up with any changes in the timeline. The head contractor will be responsible for providing you with any information regarding the project and you’ll be able to get a better estimate on the timeline of the construction from them.
Whether you are buying a home or building one, you’re liable to spend hundreds of thousands of dollars on your new home. Most buyers don't have that kind of money laying around and have to pursue different financing options to make their dreams a reality. Though it may seem difficult, securing financing to build a new home before selling your current home is completely possible.
Here are some common options to help you fund your home build.
Carrying 2 Mortgages
First and foremost, make sure that this option is financially feasible for you. While it is possible to get a second mortgage, carrying two mortgages can be a huge drain on your finances. Lenders typically aren't keen to give out second mortgage loans without a strong belief that you can afford to pay for both.
To qualify for a second mortgage you’ll likely have to put down a significant down payment and provide proof of savings or income that will cover the cost of both mortgages for over six months.
Additionally, lenders will look at your debt-to-income ratio (DTI) and credit score to determine their favorability. If they like what they see, you’ll be approved, if not, shopping around and improving your financial health are the keys to boosting your approval odds in the meantime.
A bridge loan is a loan that acts a “bridge” to cover expenses between the time of one transaction and another. They are typically used to fund the down payment of a new home purchase or build, prior to the sale of the first home. These loans work by utilizing the equity of the first home, and borrowing against it.
Like most financing options that lenders view as a high risk, you’ll have to have a good credit score and DTI to be approved. Bridge loans also come with high-interest rates, which can add up quickly depending on the size of the loan and the amount of time it takes you to pay it back.
A bridge loan is a great option for those who expect their home sale to take a short period of time. If your home has lingered on the market or you are unsure of its chances to sell, a bridge loan might not be the best option for you.
Getting a Construction Loan
Construction loans are excellent financing options for home builders. They offer two primary methods of funding: a construction-only loan or a construction-to-permanent loan. The distinction between these loans types is what happens once your home’s construction is complete.
A construction-only loan will require you to pay the entirety of the loan once your home’s construction is finished. You may have to take out a mortgage loan that will cover the costs of your construction loan, essentially allowing you to bounce from one type of loan to another. A construction-to-permanent loan provides financing for the construction of your home and becomes a mortgage loan once your home is built.
To qualify for a construction loan, you will have to show lenders you are not a high-risk customer. They will want to see a good credit score, stable income and job status, low DTI, and a sizeable down payment (think 20% or more). Additionally, you’ll need to explain your plans to your lender so that they can determine how much funding to provide.
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Staying on Budget
Keeping to your budget when building a home is difficult, because of the high cost of building a house. There are typically unforeseen issues that crop up during the construction process that can end up costing big bucks. Whether it’s the need to hire a specialist after finding a drainage issue on your land or ordering more materials after the first batch was damaged en route to your home, covering these costs are often unavoidable.
However, it’s still possible (and very important) to stay on budget when building a home. The best way to do so? Make sure you’re aware of what you can afford and what you can’t.
Here are some tips to help you stay on budget when building your home:
- Keep a fund for unexpected costs related to the construction of your home.
- Shop around for financing options, find a lender that fits your needs and your budget.
- Try to think of every expense big or small from like permits and lightbulbs to temporary housing costs.
When building a new home, selling your old one should take top priority. However, that doesn’t mean you should take the very first offer that lands on your doorstep. It’s a good idea to set up contingencies before accepting any offers, as this will ensure your financial stability and security while selling your home.
- The seller can set up contingencies that will decrease their risk when they are in the process of selling.
- Kickout clause ensures that the buyer has secured funding prior to completing the locking down the sale.
- Suitable property contingency allows the seller to revoke a purchase contract if they have not found housing.
- Buyers aren’t likely to agree to sales contingencies that heavily favors sellers.
- Contingencies can’t protect against all the risk involved in a home sale.
Finding a top-notch real estate agent is the key to a successful home sale. While you’re busy focusing on building your new home, they will ensure that your interests are protected during your home sale.
Experienced agents will work to get you the most out of your home sale, meaning more profit and fewer headaches on your end.
Despite the excitement of building a new home and selling your old one, you’ll likely face the problem of not having housing for a short period of time if your old home sells prior to the completion of your new home. You’ll have to consider your housing options to ensure that you have a place to sleep when you’re between houses.
Short-term housing is just that, housing that works as a temporary solution if you find yourself in need of housing. You’ll have to work short term housing costs in your budget.
There are a number of short-term housing options to consider, these include:
- Corporate housing
- Staying with family or friends
- Extended-stay hotels
- Work for lodging agreements
- Renting on a monthly basis
A rent-back agreement is another temporary solution for someone looking for short-term housing while selling their home. Rent-back agreements between buyers and sellers allow the seller to live in the home for a set period of time after selling their home to the buyer. Rent-back agreements have to be negotiated between buyers and sellers, with the seller paying the buyer rent for the time they stay in the home after closing.
FAQs About Building a House While Selling Your Current Home
Can you move into a house with a construction loan?
Whether your home was completed sooner than expected or you simply need to move into your new home before your construction loan has been converted to a mortgage, you should always consult with a real estate attorney before moving into a home with a construction loan. They can help you to review your contracts for any restrictions that might prevent you from moving in early.
Do you have to put a downpayment on a construction loan?
The standard down payment on a construction loan is 20%. However, it is possible to secure down payment funds using the equity of your current home to help offset the cost of a large down payment. There are exceptions to this rule, discuss your financing options with your lender.
Is it harder to get a construction loan than a mortgage?
Getting a construction loan can be more difficult than obtaining a mortgage. They typically come with stricter requirements for borrowers to help offset the risk of a short-term loan without an actual home behind it. Lenders will look to see if your credit score, DTI, income, and down payment meet their standards before approval.