How To Build A House While Selling Yours: Complete Guide And Financing Options

Selling a home can be one of the most emotional and financially impactful decisions many of us make. Depending on how long you’ve lived there, the bank of memories to wade through may be pretty full. Financially, running the numbers on what you anticipate getting for your home and how that impacts your future plans can be exciting, but perhaps a bit daunting as well. Not to mention timelines are often ever-changing, from getting the home ready to sell to coordinating your next move. It’s a lot.

When you add learning how to build a house while selling yours to this mix of tasks, it might seem overwhelming. Don’t worry though, we’ve got you. Here, we’ll take you through the process of building a house while selling yours, step-by-step with key insights to help you along the way.

Can You Build A New Home Before Selling Your Current Home?

Absolutely! Building a new home before selling a home might not be the most stress-free approach, but in the end you will likely end up with a home filled with all of your favorite choices, from the size to the finishes. The road to that shiny new house could be bumpy, but understanding the best strategies along the way will help.

One of the largest hurdles can be financing. Building a home before you sell yours and receive the big chunk of cash from a closing can stretch almost any budget.

Timelines can provide headaches as well. Figuring out when to close on your current home and move into a new one is always tricky. With new construction, things can become even murkier if your new build timeline hits any road bumps, which is very common.

How To Sell Your Home And Build A New One

To ease some of the anxiety around building a new home during the selling process, let’s dive into some key tips that will help things go as smoothly as possible.

Plan Ahead

Creating a timeline is incredibly important for building while selling, particularly when buying land to build on and estimating how long it takes to build a house. If a builder is offering new construction on a plot they already own, that can simplify things, but understanding the timing is still essential. If you need to find the land, then the architect, and then the builder, your timeline is going to stretch further and further.

Acquire Financing

Financing a home build before closing on your current home sale usually requires some form of lending. Research construction loans first, as these are tailored to the type of project you are considering undertaking. Regardless of what loan you choose, start saving for a down payment as soon as you can.

Stay Within Your Budget

When it comes to construction, budgets can balloon pretty fast if you don’t stay disciplined. Create a firm budget with construction costs and selling costs, all the while making sure you can still afford to pay your current mortgage while the process plays out.

Determine In-Between Housing

It’s important to have temporary housing in mind when building while selling. Options like short-term renting, rent-back agreements and staying with family should all be on the table. Sure, we all want to just move once, but when it comes to building a house while selling yours, flexibility and contingency plans are key.

Consider Sales Contingencies

One way to address the in-between housing situation is by setting up a sales contingency for your current home. This essentially states that the buyers of your home can’t move in until your new home is ready. This isn't the only route to take either, as many different contract contingencies can be used to make sure you are not left out in the cold with one home sold and the other unfinished.

Loan Options To Build A New House Before Selling Yours

As previously mentioned, financing is a critical component to building a house before selling yours and there are a number of loan options to consider.

Construction Loans

Construction loans cover the cost of building your new home over a short term. Once the home is complete, owners must convert to a different kind of loan, like a conventional mortgage.

Home Equity Loans Or HELOCs

If you have enough equity in your current home, consider using a home equity loan or a home equity line of credit. These are loans issued using the difference between the current value of your home and what you owe on it. A home equity loan is one lump sum you pay back over time like a mortgage. A HELOC is a loan that you draw from for an amount of time defined by the loan agreement, usually 10 – 15 years, and pay back based on the amount drawn, kind of like a credit card.

Bridge Loans

A bridge loan is another option to consider when building a house before selling yours. This is a short term loan that uses your current house as collateral until you sell it. Interest rates are often quite high for bridge loans compared to other loan types.

401(k) Loans

Borrowing from your 401(k) is another option to think about. There are, however, a few drawbacks to consider:

• You incur a 10% early withdrawal penalty if you draw from a 401(k) before age 59½.
• You could have to pay income tax on the amount you withdraw from your 401(k).
• Your 401(k) plan may or may not allow this based on the guidelines set by your provider and employer.

As with any investment, you should discuss taking a withdrawal or loan from your 401(k) with a financial advisor before you decide to move forward with this option.

The Bottom Line

Building your dream home while you sell your current home can be tricky, with financing and timelines as the chief concerns. That said, it’s not out of the realm of possibility if you plan, adapt, and learn as much as you possibly can about the process. Thinking about selling and building? You can start by connecting with a seller’s agent at Rocket Homes℠.