Second-Time Homebuyer Down Payment Strategies

Do Second-Time or Move-up Homebuyers Need a Down Payment?

The quick answer is yes, it is almost certain that you will need a down payment unless you are using a program that doesn’t require down payment (such as VA or USDA).

How much do you have to put down on a home when you aren’t a first-time homebuyer? That answer will depend on a number of factors such as the type of loan program you are using to purchase, how much you can afford, what your credit rating is, etc.

As a current homeowner, you’re in a different position than a first-time buyer. It’s likely your credit score and profile has changed, you may have equity in your current home to use to purchase your next home and the programs available to you may look a little different. Of course, it’s also possible that you may qualify for the same program that you used before. For example, if you purchased your current home with a Federal Housing Administration (FHA) loan, you may want to use that program again.

You’ll also have more options for funding your down payment. This is due to the value of your current home and the equity you’ve built up. When you do close on the sale of your current house, it’s likely you will have made a profit that can be used toward a down payment on your next home. So in many ways, you are in a much stronger position.

Can Second-Time Homebuyers Use Their Retirement Funds as a Down Payment?

When purchasing a first home, some buyers rely on funds taken from an Individual Retirement Account (IRA) to cover the down payment. It’s understandable, but it’s not repeatable.

The Internal Revenue Service (IRS) wants you to use that money for retirement, not to live in the here and now. So if you were counting on using your IRA again to afford the down payment, you’ll likely need to look elsewhere. We say “likely” because the IRS sets the guidance on this and could change their rules relating to using IRA funds for purchase non-first-time home purchase.

If you have a 401(k), you may also be able to borrow against it, but that also has a number of stipulations and conditions you’ll need to meet which are set by the administrator of your 401(k) plan.

It’s advisable to work with a personal loan officer to understand what might be involved in either of these situations.

How Does a Second-Time Homebuyer Save for a Down Payment?

If you are able to save money for a down payment, absolutely do it. But don’t feel like you’re doing something wrong if you can’t find a way to set money aside each month.

Many second-time or move-up homebuyers find that saving money is difficult. Life isn’t cheap, and it’s certainly can feel more expensive when you are paying a mortgage and covering other homeowner costs like insurance, maintenance and utilities.

Case in point, according to the National Association of Realtors, in 2024 17% of buyers think saving up for a down payment is the most difficult part of the process. This means the saving idea, while good in theory, is not always a realistic option.

There are ways you can try to make saving money easier. One of our favorite suggestions is to set up a special down payment saving account with your bank. Then have a portion of each check directly deposited into it through your employer. Doing this makes it feel like a tax, or money you never had as the funds are directly put into the special account. We recognize that this method only works if you have discretionary money available; if you are living from paycheck-to-paycheck just to cover the basic living expenses, you might need a different strategy to fund the down payment.

Can a Second-Time Homebuyer Make a Contingent Offer?

Let’s start by defining what is a contingent offer? It is an offer you write to purchase a property with the continency or requirement of selling your current residence prior to purchasing the new home; please note these can happen on the same day but the sale of your home must occur before the purchase closing can occur. Many homeowners expect to use the profit from their current home to cover the down payment for their next home, in contingent offers this is a possibility. Ideally, this is how things should work out, but it can become a complicated path that requires many things to work out just right and in a market that is competitive, some seller’s are hesitant to accept an offer with a contingency.

Here’s the thing you need to understand — you don’t make any money until the closing is completed on the sale of your current home. If you plan to sell your home and then rent a place to live or stay with a friend temporarily until you find your next home, you’re in good shape as there is more time for each piece to fall into place. However, if you are planning to use the funds from one home as down payment for another then everything must fall into place for the sale of your home prior to you being able to complete the purchase. This typically means packing your home into a moving truck and having everything out of your home prior to selling it and not being able to put your belongings into the new home until you close on the purchase. This is a very common scenario so don’t be too afraid, just understand the pieces that must fall into place for this to work for all parties.

It is important to also consider, if you don’t want to make a contingent offer that you will have to come up with down payment for the new home without the full equity from the current home and you would also potentially have a time period where you were paying payments on both houses.

Can I use a Bridge Loans and Home Equity Loan?

Second-time homebuyers that currently own their home can try turning to a bridge loan or home equity loan to fund the down payment for their next home if they are choosing not to write a contingent offer. Home equity loans and lines, generally are able to be used for down payment on a new home if they were established prior to the person having intent to sell their home. This means that these typically need to be already established in order to use them for down payment funds. An alternative that is more common and specifically used for cases where there is intention to sell the home that you are borrower funds from is called a Bridge loan.

In general, our best advice relating to these programs is to connect with a personal loan officer. These options have a fairly limited scope of who they are right for. There are limitations on who can qualify, what stipulations must be met and with Bridge loans the fees to obtain the loan are often sizable. If you don’t understand all the fees, payments, requirements and stipulations, you can get yourself into a financial mess. We don’t say this to scare you, we just want to ensure the proper caution is exercised.

Would a Second-Time Homebuyer Qualify for an FHA Loan?

Once you get your down payment strategy squared away, it’s time to look at home loan options.

If you own a home and remain financially qualified, you can use an FHA loan to purchase your next home. Qualifying for an FHA loan looks very similar for a first-time and subsequent-use buyer; the primary difference is that contingent offers essentially become a requirement. FHA typically does not allow a borrower to have two outstanding FHA loans at one time, there are a few exceptions but they are hard to come by and are assessed on a case-by-case review.

It’s a common misconception that an FHA loan is only for first-time homebuyers. Where does this misconception come from? Likely, its confusion with other federal loan programs and the fact that the first two letters of the initials are “FH” which some people believe stands for first home. You can use an FHA loan to purchase or refinance your second, third or fifth home if you continue to qualify.

Find Help Developing Your Down Payment Strategy as a Second-Time Homebuyer

Moving into your next home is an exciting idea. Turning that idea into reality will take some planning. The first step to help you start planning is to work with a local loan officer who knows the way and can guide you through the choices. Want to get started now? Complete our Quick Start Form and we’ll connect you with a loan officer that matches your specific needs. They’ll provide a free consultation and guide you through every step of the loan application process. Your next home should be better than your current home, and it will be if you approach it with the right plan.