Curve

How to avoid making a contingent offer on a home

Dan Rafter
Dan RafterThe Mortgage Reports Contributor

Making a contingent offer is not your only option

Repeat home buyers use their past experience to skip over many concerns commonly experienced by first-time buyers.

The equity in their home may provide a downpayment for their new purchase. They may choose a 20% down conventional mortgage instead of a low-down-payment FHA or VA mortgage.

But selling one home and buying another is not without its own set of concerns: repeat buyers must correctly time their current home’s sale and upcoming purchase.

It’s not an uncommon challenge. According to the National Association of REALTORS®, 68 percent of buyers were purchasing a home for at least the second time. Undoubtedly, many of them had to sell a home while buying a new one.

Repeat buyers have options even when their buy-and-sell timelines don’t fall into place; low-down-payment loans and owning two homes for a short time can increase flexibility. Buyers might not have to make an offer contingent on the sale of their current home.

Buying and selling a home at the same time is common and achievable if you go into the process with some plans – and backup plans — in place.

Verify your non-contingent buying eligibility (Oct 15th, 2018)

Qualify to keep your current home temporarily

You gain some flexibility if you can qualify for — and are comfortable making — two mortgage payments temporarily.

There are no rules against applying for the new home assuming you will keep your current home. You do not need to rent it out or say you are going to do so. You can simply add the house payment to your list of other monthly payments on the new mortgage application.

If you qualify with both homes, you are free to keep your current home and sell after you buy.

But qualifying for two mortgage payments at once can be a challenge. Lenders look carefully at your debt-to-income ratio when considering a loan application. This ratio compares your monthly recurring payments to your gross monthly income.

Keeping your current residence can lead to a higher debt-to-income ratio than the lender can approve.

For example, a homeowner makes $8,000 per month and currently pays $3,000 on her current home payment plus other monthly payments. She is looking to buy a home that will cost $2,500 per month.

In this case, she would not qualify for the new loan. Her debt payments would be nearly 70 percent of her income.

Most lenders today want your debt-to-income ratio to be no more than 43 percent. You will need a sizable income to qualify with two mortgage payments.

But a double mortgage payment is not the only consideration. You also must decide how to make a downpayment on the new home.

Verify your non-contingent buying eligibility (Oct 15th, 2018)

Don’t forget about funds for the new home

Many repeat buyers rely on equity they have built in their existing home to put toward the new home they purchase.

If you plan to keep your current residence, you won’t be able to use sale proceeds as a downpayment. So, you will need to have some cash in savings and other asset accounts.

But there are loan programs that enable you to buy without a large downpayment; one of those is the 80-10-10 piggyback mortgage.

This loan is one in which you get an 80% first mortgage, 10% second mortgage, and put 10% down.

Some lenders even allow a 15 percent second mortgage and a five percent downpayment.

This financing type comes with a major advantage for home buyers who already own a home. When they sell, they can pay off the second mortgage with the proceeds. They are left with a single, smaller first mortgage just as if they had made a larger down payment in the first place.

Still, many home buyers will find that they need or want their sale proceeds, or that they don’t qualify to own two homes at once. For them, there is another option, namely the contingent offer.

Contingent offers come with risks, rewards

A contingent offer is one in which you agree to buy the home if and only if your current home sells.

With a contingent offer, you won’t have to worry about carrying two mortgages at once. That monthly debt will be gone by the time you close on your new mortgage.

But this arrangement comes with some risks for the buyer. Contingent offers are not as attractive to sellers are are non-contingent ones.

In fact, sellers can consider other offers even after they’ve accepted a contingent offer. If they get a new offer that they like, the contingent buyers can then drop their contingency and agree to buy the home without conditions. Otherwise, the sellers can accept the new offer.

Contingent offers usually come with a deadline, too. The buyers need to sell their current home by a set date or the contingent offer will expire. Again, this means that the buyers could lose out on the home.

It’s often challenging to convince sellers to even consider a contingent offer. In hot real estate markets, many sellers will hold out for traditional offers. Then they don’t have to wait for their buyers to sell their existing residences.

Ask your real estate agent whether a contingent offer could work in your local housing market.

There’s no requirement to find a home before you sell

There is a way to avoid a contingent offer, qualify for the new loan more easily, and eliminate the possibility of owning two homes at once.

You can sell your existing home first and then start looking for a new property to buy.

This solution would most likely involve setting up temporary living arrangements, and probably renting a storage unit. It would also require moving twice.

But the extra logistics can pay off.

In low-inventory markets it might take you months to find the right home. It’s better to make a well-informed, relaxed decision than to accept whatever is available at the time.

With your current home sold, you are free not to compromise on must-have home amenities or your desired location.

What are today’s rates?

Buying and selling homes at the same time does not have to be a complicated process. Decide to sell the home before or after your upcoming purchase, then make a plan.

Today’s mortgage rates make it an excellent time to buy and sell. You can get top dollar for your home in today’s market. Home buyers are seeking savings in low interest rates, not rock-bottom home prices.

Check today’s rates and get a live mortgage quote. All quotes come with a home buying eligibility and affordability check.

Verify your non-contingent buying eligibility (Oct 15th, 2018)