Juggling Your Home Purchase and Home Sale
Purchasing a home is no easy feat. Purchasing while also selling a home can be even more challenging. No matter the circumstance, the absolute best place to start is talking with a mortgage lender. There are numerous options to consider in finding the balance that best fits your short-term and long-term goals. It is important to understand your options in full before you make any decisions. No matter what your finances look like, you will find that the overlying theme is that timing is key.
Selling Before Buying
Selling before buying is usually the easiest financially but can be more difficult logistically. There are two main benefits of selling before buying. First off, you avoid needing to carry two mortgage payments. This can help with personal budgeting, along with qualifying for a higher mortgage on the new property. If you sell before you buy, the mortgage payment on your old home will be excluded from the equation. Secondly, if you sell before you purchase, you can use any proceeds of the sale towards the down payment on your new home. On the downside, if you are moving from one primary residence to another, you may need to consider where you will live and store your items in between the two transactions. Below are two options to consider if that is an issue for you.
Consideration 1: Rent Back
When you list your home you can consider writing in a “rent back” into your contract. This means you will be renting your home from the new owners post-closing for a designated period of time. Typically, this is allowed for up to 60 days. Within those 60 days, you will need to settle and move into your new home. This will allow your current housing payment to be excluded when qualifying for a new mortgage while also giving you time to settle into the new home.
Consideration 2: Concurrent Home Sale and Home purchase
Another option, which is the greatest balancing act of all, is to consider selling your home immediately prior to settling on the purchase of your new home. This could mean signing over your home at 10:00am and closing on the purchase of the new home at 11:00am. If you take this route you will still be able to use your home sale proceeds for the new purchase. I do highly recommend using the same title company for both the sale and purchase. That way, they can more quickly and easily direct proceeds from your home sale to your home purchase. Keep in mind, if you take this route and don’t have a “rent back” put into place, you’ll need to have your items moved out of the home being sold prior to your closing. This setup may even take a little bit of luck. You would need to find a new property at a similar time to finding buyers for your home sale. Typically this means writing a farther out closing date on your purchase, to leave time to get a contract on your old home. Since this puts more pressure on your timeline, this may mean sacrificing a bit on how much to list your home for.
Buying Before Selling:
For many home buyers it is financially difficult to qualify for purchasing before selling. You will need to make sure you can qualify holding both mortgage payments and that you have funds for a sufficient down payment on the new property. You will also want to make sure you will be comfortable carrying both mortgage payments. Depending on your market, the amount of time your home takes to sell might impact this decision. The main benefit of structuring your home purchase and home sale this way is that it often allows you to make a more competitive offer for your new home. If you are not restricted by time frames and contingencies, you may have a better chance at winning your offer. An added benefit is that you will have more time to leisurely move into your new home. This may also allow you to better prepare your home to be put onto the market.
Although the benefits are plentiful, there are two hurdles you have to overcome. The first is making sure you have enough cash for a new down payment without selling your home. The second is qualifying for a new mortgage payment that fits your ideal price point while still carrying the old payment.
Availability of a Down Payment
If you are limited on funds, or if you just want to use the equity in your current home to lessen the amount you are borrowing on the new property, a “Bridge Loan” can be the perfect solution for you. This loan allows you to “Bridge the Gap” between your sale and purchase. Typically it is a short term loan that is secured against the home you are selling. This would allow to you to use some of the equity in your current home towards the down payment on the new home. Once you sell your home, that bridge loan is immediately paid off. This loan typically has higher interest rates and additional fees, but it does give you more flexibility to get into a new home using your equity without needing to sell first. Since this is only a short-term loan, the possibility of higher interest rates should be less of a deterrent. If the use of your equity puts you in a better position long-term for your new mortgage, this is definitely a great option to consider.
Buy Before Sale: Qualifying Holding Both Payments
A general rule of thumb is that every $500 in monthly liability will reduce your purchasing power by roughly $100,000. If you have a mortgage on the home you are selling after buying, that payment is being counted into your Debt To Income Ratio. There is a good chance this will have a sizable impact on your purchasing power. For example, if your mortgage payment is $2,000, that will decrease your purchasing power by about $400,000 if we are counting it against you. This is a more difficult issue to overcome and is usually what forces people to sell before purchasing. If you have more than 50% equity in your home, you may be able to consider taking out a new loan against the home. That loan can then be used to pay off your remaining mortgage balance. For this to make sense, the new loan needs to create a large enough reduction in monthly payment for you to then qualify for your target price point. For example, you can apply for a Home Equity Line of Credit to be used to pay off your existing mortgage. HELOC’s are typically interest only payments and therefore should lower how much debt is counted against you. Some HELOC’s have adjustable rates and many companies may not offer you a HELOC if you plan to sell in the near future. So, while this something to consider, it is not a guarantee.
For each of these options it will be important for you to have a knowledgeable Real Estate Agent guiding you through this process. Some of these options may require you placing offers that are contingent on the sale of your home. This would be the case if you need the old mortgage payment excluded to qualify, or if you require the funds from the equity of your home sale to qualify for your new home without a bridge loan. Depending on the market you are in, this could make getting an offer accepted much more difficult.
The last item to consider is that you may want to re-examine if selling your home is definitely in your best interest. This is another reason why it is so important to have professionals by your side. If home values are increasing in your market, it may make sense to consider the rental potential of your home. The rules for this will vary by loan program, but oftentimes your lender will be able to consider a portion of the rental income on the home you are vacating in order to help you qualify for the new home.
With the right team by your side, we can work together to create the best strategy for your personal goals. If you have any questions on what might be the best way for you to handle this big step, please reach out.