By Melinda Sineriz – Realtor.com
You should never buy a new house before selling your old home ... at least, that’s the conventional wisdom. Because if you buy before you sell, you run the risk of owning two homes at once—and carrying two mortgages! What if your first home doesn't sell anytime soon? The financial ramifications are too scary to even consider, right?
Not necessarily. For some home buyers, it actually does make more sense to buy your new home before you sell your old one. Here are six times to seriously consider this option, along with tips for handling the challenges you might face along the way.
1. You’re buying in a seller's market
A seller's market refers to times when there are more buyers looking for houses than there are houses available for sale. And this puts buyers at a disadvantage.
“In a strong seller's market, buyers face stiff competition with multiple offers and little available inventory. In that environment, it can take several tries before getting an offer accepted,” says Christine McCarron, a real estate agent and investor in Brookline, MA.
Since your efforts to buy a home may be a long and arduous slog, it may make sense to secure a deal on your new digs before you put your current house on the market. This is especially true if your old home is also located in a seller's market, which is likely if you're buying a new house in the same area. This means you'll probably have plenty of interest in your home, and no problem selling it once you're ready.
Not sure what kind of market you're in? Here's more on seller's markets and how to tell if you're in one yourself.
2. You want to remodel your new home (or your old one)
If you’re living in a fixer-upper or you have your eye on one, buying before you sell may actually make a whole lot of sense. The reason: This strategy gives you a place to live while renovating the other residence. That way, you and your family don’t have to live in a construction zone!
And here's another perk: If you’re fixing up the house you currently own, it could boost your home's value, which positions you to receive top dollar for it, according to Ralph DiBugnara, vice president of retail sales of Residential Home Funding in New York City.
3. You have kids
Let's just say it's not easy to sell a house that's overrun with children, and all the toys and messes that crop up in their wake. It can even hurt the odds that your home will sell at all.
“With an active family, the pristine condition that home buyers expect—due to TV shows that display staged, model-like homes—just doesn’t happen unless everyone is out, everything is cleaned, everything is repaired, and the home is staged with furniture with no worries of it getting covered in grape juice," says Cari McGee, a real estate agent in Kennewick, WA.
Getting your home sales-ready, and keeping it that way, may be simpler if you’re already living in your new home (plus, you don’t have to uproot your little ones more than once).
4. You’re downsizing
Downsizing is an especially challenging task. You’re faced with sorting through the contents of your current home, which tends to be a time-consuming and emotional ordeal. Buying a new home before selling gives you time to sort through your belongings and simplify the process.
Lukasz Kukwa, a real estate agent in Westfield, NJ, has seen this approach work well for his older clients, particularly since with downsizing, the second mortgage is probably a smaller one.
With downsizing, "it is a good idea to take this approach—buying before selling—since the financial burden of carrying two mortgages will be of smaller significance since you're buying a cheaper, smaller home,” Kukwa says.
5. You’ve found a great deal, or your dream home
Some houses are just too good to pass up. If you’ve found an amazing bargain or the home of your dreams, you may want to snap it up! If not, you might regret how playing it safe meant you missed out on this once-in-a-lifetime deal.
6. You can deal with moving only once
Here's one huge downside to selling home No. 1 before buying home No. 2: You'll probably have to endure the wholly unpleasant process of moving twice.
“If the homeowner sells their existing home first, it requires them to move out and find temporary housing and storage. Once the new home is purchased, it would require moving again,” says Jeffrey Hensel, broker associate at North Coast Financial in Oceanside, CA. "Moving twice is inconvenient and costly."
According to the American Moving & Storage Association, the average cost of moving in state totals $1,170. An out-of-state move will cost much more: $5,630. If moving and coughing up that amount twice is a major turnoff or an all-out deal breaker, then you're certainly a candidate for buying before you sell.
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How to buy a new home before selling your old one
Even if you have good reason to buy before you sell, that doesn't mean it'll be easy. For one, would you even qualify in lenders' eyes to carry two mortgages at once? And would you want to? Here's how to navigate these challenges.
Can't carry two mortgages? Consider a bridge loan
First off, let's face the fact that even if you're fine having two mortgages, lenders may not feel the same way about your prospects.
“Because of debt-to-income ratios, it may be impossible to qualify for the second mortgage before paying off your first,” says Eric Sztanyo, a real estate agent in Cincinnati.
Your debt-to-income ratio refers to the amount of your debt payments compared with the amount of your gross monthly income. Lenders are typically looking for a low debt-to-income ratio, with less than 28% of your monthly income going to mortgage payments. If a second mortgage will take your debt-to-income ratio over this percentage, you may not be able to qualify for a second mortgage.
In this situation, Sztanyo recommends considering a bridge loan.
With a bridge loan, "you are able to buy the second home using the equity of the first home,” he says.
A bridge loan is a short-term loan based on the equity and value of your current residence. You typically need at least 20% equity in your home as well as good credit to qualify. These loans often have high interest rates, though, and if your home doesn’t sell quickly, you may be stuck making loan payments on top of your new mortgage payment.
Add a home-selling contingency to your contract
Even if you do qualify for two mortgages, that doesn't mean you'll be comfortable doing so. If the very idea of stressing your finances like this makes you break out in a cold sweat, consider adding a home sale contingency to your home purchase contract. This contingency gives you a set amount of weeks or months to sell your current home before your new home purchase goes through—thus buying you some much-needed time.
The downside? This contingency is not particularly appealing for sellers who want to move soon. That said, some may be willing to opt for this option if they don’t have many offers or are on a flexible schedule to move out.
