You’re living in your first house, and it’s been a while. Maybe long enough that your family has grown, and now you need more living space. A few other “life” things may have happened since then. You might have two or three extra family members than you did when you first moved, and maybe you have a different job or have had an increase in income. Maybe those extra family members need to start school soon and now you’re looking at different school districts. The bottom line? Time to look for your next house.
The term “contingent” and “non-contingent” weren’t really brought up during your first home search. You were a first-time home-buyer back then, and had so much to learn. The question of whether you need to sell your home before or after you purchase your next house is being brought up by your real estate agent, and you don’t know how to answer…. The answer is pretty simple, and can be explained in two parts. One, do you need the cash from the sale of your first house, and two, can the bank qualify you for a new house while holding the mortgage for the first one?
There are clear advantages in a hot market for being able to offer “non-contingent.” Non-contingent generally means you can buy a new house without the contract contingency of your current home being sold prior to closing on the new one. When a home seller sees that you are “contingent,” that means that you are NOT depending on your house selling prior to them getting paid. The advantage for you as a buyer is clear; you are more competitive.
To elaborate on the two part answer of whether buying non-contingent is even a possibility for a second or third time home-buyer, having enough cash on hand for a down payment is key. If you have lived in your current home long enough, chances are you have built some equity and can bank on getting a good sized proceed check from the sale. That cash is usually used for the purchase of your next house. If you are buying your next house non-contingent, you might not have quick access to that cash. The main way I recommend people leverage that equity is by either taking a loan from their retirement, or getting a home equity loan to “bridge” the gap from the first home to the next. Either way, once your first home sells, either “bridge” loan can be paid off in entirety.
The second part is typically the bigger crutch. Qualifying for one mortgage can sometimes be difficult enough, but now we have to qualify you to make the payments on two mortgages. This is where the possibility of increased income comes into play. We have to make sure the debt-to-income ratio including both mortgages is within the guidelines of your loan product.
I realize the second part is a little less straight forward than the first. If you are thinking about the possibility of purchasing your second or third house, contact your local mortgage professional, like myself, and I’d be more than happy to help you gain a good understanding of your options.
Blog written by Lucas Hine and you can get prequalified with him at PreQualifyPro.com