Ah, to be a first-time home buyer again: How easy it was to buy a home when you weren’t carrying another mortgage on your back at the same time!
If you’re looking to graduate from first-timer to repeat buyer, you know things are about to get much trickier. Unless you’re a bona fide house collector, you’ll have to sell your home in order to buy anew—adding a whole separate layer of anxiety to what you already know is a stressful home-buying process.
In an ideal world, you’d buy a new home, move, and then, when all the dust settles, deal with the turmoil of selling.
But for most people, that’s totally unrealistic. Not only does it cost a lot, since you’ll be paying two mortgages at the same time, but sellers of your potential new home might be quick to judge if you’re holding on to your current home.
Drew Snyder, a Realtor® with Snyder Sutton Real Estate in Topanga, CA, says one of his clients had difficulty getting sellers to “take them seriously unless the house was on the market or in escrow. As soon as we put it on [the market], they were considered as serious buyers.”
So, while shopping for a new home and selling your current home at once may sound like a real estate nightmare, it may be your best option.
Here’s what you need to know to make sure both processes go as smoothly as possible.
Know the market first
Before you start seriously searching for a new home—or put your current home on the market—make sure you have a solid understanding of the housing market in your area (and the area where you’re planning to buy).
Ask your real estate agent: Is the market weighted toward buyers or sellers? Only then will you be able to fully strategize. In real estate, your best plan of action may depending on whether sellers or buyers are in the more powerful position.
One way to play it safe is to keep your mind open to lots of buying options. If it’s a seller’s market, you might find that you’re able to get your home sold quickly, but that the homes you tour with your real estate agent just aren’t up to par.
If you can widen your search and find multiple homes you’re interested in, you’re less likely to find yourself in trouble if a purchase falls through—selling your current home won’t leave you stranded.
Another way to protect yourself is to hire an appraiser and price your old home fairly.
If it’s a buyer’s market, you have to know that your home has lots of competition. You may not have the time or energy to update your home, but one thing you can do is set a reasonable price that will get buyers interested.
Now is decidedly not the time for delusions of grandeur: Two extra months on the market because you couldn’t humble yourself to lower the price means two months that you’ll be paying double mortgages. Two very long months…
Plan your schedule carefully…
You might be asking: Should you try to buy first, then sell—or vice versa? Both have their risks and rewards.
Selling first makes getting a mortgage easier, but it also means you’ll need to find a temporary place to live.
Buying first means that moving will be easier, but it also skews your debt-to-income ratio, making it harder to qualify for a new mortgage—not to mention the difficulty of juggling two monthly house payments.
Your down payment can be difficult to come up with, too, if all your money is tied up in your old home.
“It’s walking a tightrope,” says Gary DiMauro, a Realtor in New York’s Hudson Valley. And he’s not just talking about scheduling: Your finances will be on the high wire, too.
When determining whether you should sell or buy first, think beyond “How can I make the move as easy as possible?” Instead ask: “Can I handle two mortgages? What if my home sells for less than its listing price?”
Whichever option you choose, make sure you’re prepared to accept the consequences: either having to store your stuff and rent temporarily, or undergoing the financial burden of dual mortgages.
… but don’t rely on timing
When buying and selling a home simultaneously, “There are so many external circumstances,” says DiMauro. “I’ve yet to see it really work smoothly and efficiently.”
Remember: You’re not the only party in this equation. For every seller there’s a buyer, for every buyer a seller.
While things might appear to be working smoothly when viewing your master plan from above, that doesn’t take into account the varying fortunes of the people you will be working with.
Closings are rife with delays. Your buyers might have difficulty securing their mortgage; your home inspector may bring up issues that need to be fixed before you can move in.
“You’re relying on the seller of the place that you’re buying to be ready to move, in concert with the buyer of your house,” DiMauro says.
So even if you’ve planned to sell your home first and are prepared to rent while buying, know that even the best-laid plans go awry—and that you might end up juggling both mortgages. Preparing yourself for this (however remote) possibility ahead of time will ensure a smooth transition.
Know your financial solutions
For those who choose to sell first, the process is relatively straightforward: taking on the additional cost of a rental between homes.
However, you might want to consider the option of a rent-back agreement, where you negotiate with the lenders and buyers to be able to remain in the property for a maximum of 60 to 90 days—often in exchange for a lower selling price or for rent paid to the buyers.
This can relieve some of the pressure of finding a new home, giving you additional time to house hunt.
But if you’re buying first, talk to your Realtor about ways to decrease your financial burden and risk. Here are the two most popular options for buyers:
- Contract contingency: Buyers can request that their new home purchase be dependent on the successful sale of their old home. If you’re looking in a competitive market, this may not be a good option. However, if the seller of your intended home has had difficulty attracting interest, this may be a good deal for all parties involved—assuming that you can persuade them that your home will sell quickly.
- Bridge loan: A bridge loan allows you to own two homes simultaneously if you don’t have deep pockets for a second down payment. This option is especially attractive if you’d planned to sell your home first and use the proceeds to buy the second. It functions as a short-term loan, intended to be repaid upon the sale of your original house.
Don’t let fear rush you
If your home has sold but you haven’t found a new place to live, don’t let anxiety push you toward a bad decision.
DiMauro usually recommends that his clients preemptively plan on a short-term rental “so they don’t feel stressed or pushed into something that they would not normally be interested in,” he says.
“They shouldn’t make a purchase because they felt like they were pressured from the time constraints.”
Found the perfect home right on schedule? That’s great. But don’t feel that you have to compromise on things that are important to you just because you need to find a home.
Conversely, don’t accept a bid that you feel is too low just because your finances are strained by two mortgages. If you have a temporary apartment set up, you’re less likely to compromise.
Certainly, selling and buying a house simultaneously will be stressful—but carefully considering and planning for the risks and hurdles can mitigate the stress.