How to build a new house while owning another

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.

We are still in the design process of our home. We own the land already, (no mortgage) we are building on.

I of course plan on speaking to our lender about this scenario, but I would like to hear from others on what they personally did and was it your choice, or can/did the bank require you to sell your current home before construction? (That is if it's the equity in your home that you are using for the new build)

My question/dilemma is about when to put our current house on the market. The market is hot in our area, homes lasting from 1-21 days on the market. The equity in our home is the only way we are able to build. I see a lot of people here say they sold and moved into a rental during construction, which could absolutely make sense for some, but here in my area, even for a crappy rental or small apartment (family of 4) it would cost us at least an EXTRA $500 a month in rent compared to our current mortgage. So that scenario just isn't a financially smart move. We could move in with my parents for the last couple of months before the new house would be finished ...

I guess I'm wondering if the bank can have any say on the situation pending we could still make the construction loan payments and with an appraisal of our house would know the general amount of equity we have when we sold that they wouldn't blink an eye if we stayed in our home until closer to completion... this very well could be a dumb question, but since I see so many people say they rented while building it made me wonder if that was your choice that made the most sense for you or if the bank wants to see the large sum of money already liquid even though that money isn't used until the construction loan is converted to a permanent loan?