In a perfect world you’d have an approved buyer for your home at the same time you’re contracted to purchase a new one, and you’d close both homes on the same day. Nowadays this scenario is highly unlikely as it’s very difficult to comply with lender’s regulations and coordinate two closings in one day. And of course there’s no sure-fire way to find a new home and a buyer for your current home at the same time. So what do you do? Sell your home first and then hope you find a new one quickly? Or vice versa? Certainly you can try to sell and buy around the same time, but it can get tricky. Consider the following scenarios and options.
Scenario #1: Sell First, Then Buy
People who don’t qualify to hold two mortgages at the same time need to sell first. Most people need funds from the sale of one house to purchase another. Even if you’re able to pay two mortgages at the same time, you may not want the financial stress of doing so.
Let’s say while negotiating the sale of your current home, you’ve found a new one that will need to close several weeks after your current home. You could include in the contract of your old home a contingency that allows you to stay there until you’ve closed on the new one. This contingency would require a move-out date agreeable to the buyer. In many cases, the buyer will require compensation for the extra time that you stay in what is now their new home. You’re effectively renting from them. But what if the buyers want you out on the day of closing? In such a case you’ll need to plan temporary storage of your home’s contents as well as temporary housing for your family.
Now let’s say you’re negotiating the sale of your current home and you haven’t found a new home yet, or worse, you keep getting outbid by other buyers. You’re able to use a contingency in the contract of your current home that delays setting a closing date (1) until you’ve found a new home and established its closing date or (2) until a certain number of days have passed that is agreeable to the buyer. Most buyers won’t agree to an open-ended closing date, but some might be agreeable to a specified closing date beyond the usual 30-45 days if they really want the house. However, if your buyers are itching to move, you could risk losing the sale if you’re not flexible. In such a case, you’re back to the inconvenience of planning temporary housing and storage.
Scenario #2: Buy First, Then Sell
People who already have a home paid off or are able to carry two mortgages might choose to find a home first and then sell their old home. This gives you time to conduct a home search without a strict deadline and then move in directly without worries of temporary housing and storage. It also allows you extra time to declutter, make repairs, and improve the appearance of your current home to get it ready for sale. Obviously if you’re buying before your own house is sold and you still have a mortgage, you’ll need to be approved to handle two mortgages.
Some sellers choose this method but it does create a financial burden because they underestimate the length of time it takes to sell. If finding a buyer proves difficult while carrying two mortgages, some home owners choose to rent out their old home to wait for market improvement. Or they choose short-term renters and simultaneously try to sell so that their house is exposed to buyers while receiving income on the property that goes toward the mortgage. Of course in this case, you now have the burden of being a landlord and worrying about the condition of your property with tenants.
Another option for buying first is qualifying for a bridge loan. This type of loan bridges the gap between the sale price of a new home and the buyer’s new mortgage in the event that the buyer’s old home has not sold. It’s a short-term loan that uses your old home’s equity to help pay for your new home. The loan money is used for a down payment on your new house and then you repay it when you sell your first home. Obviously there are origination fees and interest rates associated with such a loan. You could also get a home equity loan on your old home instead of a bridge loan, but you might not be able to put your old home on the market right away. You’d have to adhere to the lender’s terms.
Weigh the pros and cons of each scenario with regard to your situation before embarking on the journey. Know your market and your options, then plan your home buying and selling strategy accordingly.