Buzz
Purchasing a home is a significant task, and all the paperwork, deadlines, and research can be quite overwhelming. Add selling a home to the mix, and it becomes an even bigger, more stressful challenge. Here are some things to consider when you're navigating both buying and selling a home at the same time.
To clarify, it's possible to buy and sell a home around the same time, but it’s unlikely that both transactions will close on the same day. While perfect timing would be ideal, the process is rarely that smooth. You'll be subject to market conditions and the actions of potential buyers. It's possible to find a new home you're ready to purchase, but still not have anyone place an offer on your existing home. Alternatively, you might have a buyer lined up for your home, but haven’t yet found your next place.
While there are ways to coordinate your closing dates, most likely, you'll need to prioritize either buying or selling first, and each choice has its own set of advantages and disadvantages.
The advantages and disadvantages of selling first
Selling your home before buying a new one gives you a clear understanding of your budget. It also makes securing a new mortgage easier since you won’t have two mortgage payments at once. From a practical standpoint, selling first is often the most efficient approach. However, this strategy also comes with some potential drawbacks.
One downside is that you might sell your current home without having a new one lined up. This could mean renting temporarily or storing some of your belongings. But don’t worry—there are solutions to manage this situation, which we’ll cover shortly.
Additionally, if you're planning to invest your home equity, it’s important to understand the numbers. Before selling, you may apply for a home equity loan or a home equity line of credit (HELOC), which is based on the equity you’ve built in your home. You can invest this loan to earn a return. However, if home prices increase during the waiting period, you could lose out on those potential returns.
Here’s Bankrate on how you might find yourself “underwater” on your mortgage:
For instance, imagine you owe $300,000 on your mortgage, but home prices in your area have dropped significantly, and the market value of your home is now only $200,000. This means your mortgage is $100,000 higher than the value of your property. When your mortgage is underwater, it becomes much more difficult to get approved for debt refinancing or a new loan with better terms.
Of course, this type of investing carries some risk, and it doesn’t always make sense. If you’re into this approach, it’s another reason to get familiar with the market. But we’ll dive into that a bit later.
The advantages and disadvantages of buying first
If you purchase a home before selling your previous one, you have plenty of time to make the move. This gives you more flexibility to prepare your home for sale and take the process at a more comfortable pace.
However, if your home doesn’t sell quickly, you might end up paying two mortgages at the same time. If your home is already paid off, this isn’t a big concern, but most people would struggle to handle two mortgage payments. Additionally, qualifying for a new mortgage becomes harder with two payments, as it significantly increases your debt-to-income ratio. Home Guides explains how this works:
In order to buy a home before selling your current one, your income needs to be able to cover both mortgage payments at the same time. If you’re already struggling to qualify for a new loan without factoring in your old mortgage, it’s likely you won’t qualify with both unless you find a lender willing to accept a higher debt-to-income ratio.
If you buy first but don’t immediately find a buyer for your current home, you could consider renting out your old property temporarily. This can help cover the mortgage payments while you settle into your new home. However, this also means taking on the additional responsibility of being a landlord.
Understand the real estate market
Although selling first might appear to be the better option, it ultimately depends on the market conditions. Research property prices in both the area where you're buying and selling, legal site Nolo explains. Find out whether the market is more favorable to buyers or sellers. This will allow you to play to your strengths and protect yourself in the weaker position, as they suggest.
Generally speaking, selling first is ideal in a buyer’s market. In a seller’s market, buying first may be a good strategy, as long as your property is likely to sell quickly.
Synchronize your closing dates
Ideally, you’ll want the closing date for selling your old home to occur after you’ve closed on your new one. You can make the timeline work more smoothly by preparing for one process while actively handling the other.
For instance, if you’re focused on selling your current home first, take the time to research your next home purchase in the meantime. Stay on top of your credit score, explore loan options, and familiarize yourself with the market. We also have extra tips for getting ready for a future home purchase, so make sure to check them out.
If you’re in the process of buying first, use the time to prepare your current home for sale. Take care of any maintenance issues, declutter, clean, and start looking into realtors and home stagers.
Include a contract contingency
You can also coordinate dates by requesting a contingency in your contract, whether you’re buying or selling. If you’re the buyer, you can ask the seller to make your purchase dependent on the sale of your current home. Nolo explains that this might be helpful for sellers who are struggling to find a buyer. They also suggest that you should be prepared to give them reasons why your home will likely sell quickly.
If you’re selling, you could negotiate with your buyer instead. Ask to include a contingency in the contract that ties the closing date to the sale and closing of your new home. Nolo explains:
Although few buyers will agree to an open-ended time frame, some may be so eager to purchase your home that they’ll accept a delayed closing until you close on a new property or until a certain number of days pass, whichever comes first. Also, be sure to do thorough research on the market before you sell so you’re an efficient buyer, ready to offer the right price on favorable terms.
Of course, this isn’t always feasible and depends on the market conditions. But it remains an option.
Another possibility is a rent-back or lease-back arrangement. With a rent-back, the buyer agrees to let you “rent” your current home for a short time after selling it. You can negotiate a lower price or agree to pay rent to the new owner. In return, you get to stay in your home for typically 60 to 90 days while you search for a new place. Realtor.com has more details about this here, but keep in mind that not all lenders permit it. Still, it can be more convenient than selling your home, moving into a rental, and then relocating again to your new home.
Explore bridge financing options
Bridge loans are designed specifically for individuals who are in the process of both buying and selling a home. These short-term loans allow you to cover the down payment on your new home before selling your old one, and you can repay the loan once your old home is sold.
However, bridge loans come with a high cost. Nolo details it:
Bridge loans can be significantly more expensive than traditional mortgage or home equity loans, as they require higher upfront payments and often come with higher interest rates. They’re also difficult to qualify for, as you’ll need substantial equity in your current home and enough income to support both mortgage payments indefinitely. The stringent requirements can often outweigh the loan’s benefits!
Alternatively, you could consider a home equity loan or a HELOC, though this might delay your ability to list your home immediately. Some people also choose to borrow a short-term loan from a family member to cover the down payment and closing costs.
With some careful planning, you can reduce the stress of buying and selling a home simultaneously. Understand the market, explore your options, and devise a strategy to make the entire process as smooth as possible.
