Building A Home When Your Already Own One Can Get Complicated — Let Us Help You Keep Things Straight & Level
So You Want To Sell A House And Build A New One. Well, You’re Not Alone!
Let’s start by getting something straight: there are no restrictions against financing your new home while carrying a mortgage for your current property. Which is good news for a lot of folks! Many people who want to build their dream home from the ground up will need to obtain construction financing from a lender, and the number of people choosing to sell a house and build a new one is increasing every year.
That being said, choosing to sell a house and build a new one (in that order) may be the best way to go about financing your new home even though it requires that you arrange interim housing. That’s because construction mortgage loans are not like standard mortgage loans; they often have higher interest rates, more stringent pre-qualification requirements, and require a dramatically larger down payment at the outset. This makes building a home when you already own one especially risky, and also means you’ll be able to get a larger construction loan if you sell your house first and build the new one second.
The Biggest Decision You Need To Make About Building A Home When Your Already Own One
The most important choice you need to make to sell your house and build a new one — even before you seek financing for your new home — is whether you’ll sell your current home before, during, or after building.
Option 1: Stay In Your Current Home & Don’t Sell Until After Construction Is Complete
If you choose to stay in your current home during construction (and wait to sell until after construction is complete), it’s absolutely integral that you work with your lender to get a construction loan and set payment/interest conditions that you’ll be able to afford while also continuing to pay your current mortgage. You can also secure what’s known as a ‘bridge loan’ to help cover your mortgage while also financing your new home construction, but some industry experts note that these loans are nearly-never worth it because of the risk of losing control of the debt. This, of course, doesn’t apply if you’ve paid off your current home loan (though the lender will still consider any other debts and financial responsibility when determining what you can afford when financing your new home).
Option 2: Sell Your Current Home During Construction But Stay In It Until Construction Is Complete
Choosing to simultaneously sell a house and build a new one is not for everybody. Home selling and home building both take a lot of time and effort from the homeowner (even if you hire a realtor and a builder to lead each of those processes). That said, if you’re able to make it work, this can be the most seamless way to go about building a house when you already own one.
That’s because you can work with your builder and your buyer to develop a timeline for completion and closing, respectively, so that you can move out of one house and into the other as soon as construction is over. This is possible using a not-uncommon type of post-closing agreement called a seller rent-back agreement. In this case, the buyer may agree to let you remain in your current home (as a paying tenant) until construction is complete on your new home.
Option 3: Sell Your Current Home Before Construction Begins
As we mentioned before, this option is likely the safest way to approach selling a house and building a new one. That’s because you can arrange and close the sale, then pay off any existing home loans before financing your new home. You can also use the net profit from selling your current home as additional cash on-hand to cover building-related expenses. In these cases, you may not even need to close the sale of your current home before financing your new home, just schedule closing before breaking ground.
Haven’t made the decision yet? Contact our team of experts and we will be more than happy to explain everything to you in detail.
