The process of buying your new home is way more complicated when you have to sell your current home too. Many homeowners are either intimidated or confused about the process but you can avoid some of the stress.
The ideal situation, of course, is to be able to purchase your new home first and then deal with selling down the line. However, for most people, that is not realistic. Unless your current loan is paid off, you would be responsible for paying two mortgages. In addition, outside of the financial burden, two mortgages are also likely to kick your debt to income ratio above acceptable levels for mortgage qualification.
Most buyers will need to buy and sell simultaneously. This is doable with some advance planning.
Know the Market First
Before you start, make sure you have a solid understanding of both the local housing market where you live and where you are planning to buy. Is the market weighted toward buyers or sellers? This will affect both the pricing strategy for selling your home and set expectations for buying in the new location. You’ll also want to have a market analysis or appraisal done for your current home so that you have an estimate of the market value and expected proceeds from the sale of your home. You’ll want to be sure that the proceeds from the sale of your home can not only pay off your existing mortgage but leave enough for the funds needed to purchase your new home.
Talk to a Lender
Mortgage guidelines have likely changed since you bought your current home. Your credit score and income might be great but if you bought during the housing bubble, you’ll find the process and guidelines much tighter than before. Income documentation, debt to income ratios, impact of student loans are all things that may have changed and may impact your loan qualification. The lender will also be able to let you know the loan amount that you qualify for.
Decide Whether You Will Buy or Sell First
Should you buy first, then sell – or vice versa? Both options have their pros and cons. Selling first makes getting a mortgage easier, but it also means you’ll need to find a temporary place to live. Buying first means moving will be easier but you’ll be carrying two mortgages. This may not be financially feasible and it may make it harder to you to qualify for a new loan. Whichever order you decide, figure out how you will handle any wrinkles that may arise.
Know Your Solutions
If you are selling first, you’ll need to plan for the storage of your stuff and find options for a short term rental. One possible option to avoid two moves is the inclusion of a post-close possession clause in the contract. With this option, you would make an agreement with the buyer of your home that allows you to stay in your home after closing and pay rent to the buyer for the period of time needed for you to close on your new home. This option may be less likely to succeed in a buyer’s market where the greater supply of available homes gives buyers less incentive to make this compromise.
If you are buying first, there are a couple of different options to decrease your financial burden and risk:
- Contingency on the Sale of Your Home – You may be able to include a contingency in the purchase contract where there is an agreement that the purchase of your new home is contingent on the sale of your existing real estate. This is more acceptable to the seller if you already have an accepted contract on your existing home. The option may be a challenge in a seller’s market where the stricter supply of homes favor sellers and make them less likely to make the compromise.
- Bridge Loan – A bridge loan is a short term loan that gives you the additional funds needed to carry two loans. The loan would be paid off from the proceeds of the sale of your existing home. You would need to make sure that the sales proceeds allow you the funds needed to purchase the new home and pay off the bridge loan. Do your research before committing to this option.
Don’t Let Fear Push You into a Bad Decision
Some of the uncertainty in this process can be managed by planning carefully. As stated above, know your market so you can price your home appropriately which should reduce the time on market. Take the extra step of getting pre-approved for your home loan rather than just pre-qualified. Also, plan upfront for the potential of things not going smoothly so that you won’t be forced into making a bad decision. You may want to know your options for a short term rental (or staying with family) in case you end up selling before taking possession of your new home. Finally, have more than one home in your basket of alternatives for purchase in case there is a problem with your first choice. If you don’t plan, you may feel forced into accepting a low bid on your current home or compromising on the things you want in your new home.
Selling and buying a house simultaneously can be stressful – but careful considering and planning can help mitigate the stress.