Conventional wisdom states that it’s never a good idea to buy a new house before you sell your old one. This is because if you sell, you run the risk of owning two homes at once and no one wants to carry 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 does actually make 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.
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. This puts the buyers at a disadvantage. In a strong seller’s market, buyers face stiff competition with multiple offers and little available inventory. In the environment, it can take several tries before getting an offer accepted.
Since your efforts to buy a home may be a long process, 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.
You Want to Remodel Your New Home
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. 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.
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, pristine condition that home buyers expect, due to TV shows that display staged and model-like homes. This just doesn’t happen unless everyone is out, everything is fixed, everything is cleaned, and the home is staged with furniture with no worries of it getting covered in grape juice. Getting your home sales-ready and keeping it that way may be simpler if you are already living in your new home.
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. With downsizing, it’s a good idea to take this approach since the financial burden of carrying two mortgages will be of smaller significance since you’re buying a cheaper, smaller home.
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 no, you might regret how playing it safe meant you missed out on this once-in-a-lifetime deal.
You Can Deal With Moving Only Once
Here’s one huge downside to selling home No.1 before buying home No.: You’ll probably have to endure the moving process twice. If the homeowner sellers their existing home first, it required them to move out and find temporary housing and storage. Once the new home is purchased, it would require moving again. 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.
How to Buy a New Home Before Selling Your Old One
Even if you have a good reason to buy before you sell, that doesn’t mean it will be easy. For one, would you even qualify in lenders’ eyes to carry two mortgages at once? And would you want to?
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 debt-to-income ratios, it may be impossible to qualify for the second mortgage before paying off your first.
Your debt-to-income ratio refers to the number 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 ration over this percentage, you may not be able to qualify for a second mortgage.
In this situation, you should consider a bridge loan. With a bridge loan, you are able to by the second home using the equity of the first home. 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 is 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.
