Buying and selling a home are each stressful enough in their own right, never mind trying to accomplish both at the same time. If you own a home and are thinking about moving, you’ve probably wondered the best way to go about it. Should you sell your current home and then purchase a new one, or is it better to buy a new home, and then sell your existing one? Let’s take a look at both options.
Option 1: Sell your home, and then shop for a new one.
One of the major benefits of selling your home before purchasing a new one is that you won’t end up having to pay two mortgages while you wait for your existing home to sell. If you haven’t sold your home yet, you could find it difficult to be approved for an additional mortgage. And, even if you do qualify for another mortgage on top of your existing one, you won’t qualify for as much money as you would have if your first mortgage were paid off. So, if you’re looking to upgrade to a larger home, your best bet may be to sell, pay off your existing mortgage, and then apply for a new one.
But selling before buying does come with some potential downsides. First, there is no way to predict which homes will be on the market once your home sells. 2024 is shaping up to be another extremely competitive year for home buyers, with housing inventory in Massachusetts and Rhode Island at historic lows. A big concern is that you won't be able to find a new home once yours has sold. The good news is that with so few homes on the market, it puts you in a pretty good bargaining position as a seller. Here are some options you might consider:
- Sell with a contingency. When you place your home on the market, one option is to include a condition in the listing stating that the sale will be contingent on you finding suitable housing. This lets the buyer know upfront that if you don’t find a home within a specified period of time following the signing of the purchase agreement, the buyer can either back out of the deal or grant you an extension for finding a new property.
- Request a rent-back agreement. A rent-back agreement allows you to sell your home, and then rent it back from the buyer for an agreed-upon period of time so you can find a new home. This type of agreement can give you a chance to close on a new home before moving out. It can be a mutually beneficial deal if the buyer isn’t in a hurry to move into the home. The rental fee you’ll pay the buyer will usually mirror their mortgage payment, and will cover principal, interest, insurance, and taxes.
- Find another property to rent. If the buyer won’t agree to a rent-back agreement, another option is to sell your home and then rent an apartment or house elsewhere. Although it will mean having to relocate for a second time once you find a new, permanent home, it can give you the time you need to find a new house without feeling rushed. And, it could come in handy if you end up buying a home that needs renovating, giving you somewhere to live while the home is worked on. When looking for a property to rent, you’ll just need to find one with an agreeable leasing term. You won’t want to commit to a long-term fixed lease if you’ll be moving into a new home in a few months. Try to find a month-to-month rental agreement, or a suitable short-term lease if you can. You’ll also want to find a place large enough for all of the belongings you’ll be moving out of your existing home. Otherwise, you could end up having to rent a storage unit as well.
- Stay in a hotel. Obviously, a hotel could get pretty pricey if it takes you a few months to find a new home, but there are many “extended stay” hotels out there that could make it a viable option. Keep in mind though that because hotels are furnished (and are usually on the smaller side) you’ll need to find somewhere else to store your stuff while you house hunt.
- Stay with family or friends. If you’re fortunate enough, you may be able to find a family member or close friend who will let you stay with them temporarily while you shop for a new place.
Option 2: Buy a new home, and then sell your existing one.
Closing on a new house before selling your current home allows you to stay put and not have to arrange for temporary housing. It also allows you to start your new home search on your terms. Instead of scrambling to find a home as fast as possible post-sale, you can find the home of your dreams, and then deal with selling your home. This likely sounds great, but the real trick is finding out how to make it work logistically. Here are some ways you could potentially do it:
- Temporarily hold two mortgages. The easiest way, if you can swing it financially, is to temporarily hold two mortgages. However, this can be risky if you end up having a hard time selling your current home. You need to be realistic about how long you can afford to pay two mortgages. And, you’d need to qualify for the additional mortgage. If you already have a mortgage, that debt will factor into the amount of home you can qualify for. Financial institutions typically look at your debt-to-income ratio when determining how large of a mortgage you can get. Having an existing mortgage could prevent you from qualifying for a new mortgage altogether, or it could prevent you from qualifying for the amount you need to buy your dream home.
- Use a bridge loan or line of credit for a down payment and closing costs. If you are able to qualify for the new mortgage while still holding your existing mortgage, you’ll still have to consider your down payment and closing costs. If you have ample money saved up and readily accessible, you’ll be all set. But, if you were planning to use the proceeds from the sale of your home towards your down payment, you’ll be out of luck if your home hasn’t sold yet. This is where a bridge loan or a bridge HELOC could come in handy. This kind of short-term financing allows you to tap into the equity of your existing home to help cover the down payment and closing costs associated with your new home.
- Buy on contingency. When you find a home you’d like to buy, one option is to put in an offer that is contingent on the sale of your existing home. This gives you the chance to withdraw your offer if your current home doesn’t sell before the closing date and eliminates the need for you to carry two mortgages at the same time. But, since there’s really nothing in it for the seller, you're likely to have a hard time finding one who will agree to the terms, especially in today's highly competitive market.
- Consider buying in a new home development. When a new neighborhood is being built, the homes are usually sold on a first-come, first-serve basis before they’re constructed. Generally, you’ll need to pay an amount up-front in order to reserve the home while it’s being built. Typically, this deposit can range anywhere from 1% to 10% of the purchase price. Then, you’ll pay the remaining balance once the home is near completion. This can allow you to secure a new home and neighborhood, while still giving you time to sell your existing home. It’s important to note however, that if you’re not able to sell your home by the time the remaining balance comes due, you could be faced with having to carry two mortgages, or you could be forced to forfeit your deposit and you could lose the new home.
Determining the best way to sell your home will depend on a number of factors, including your unique needs and current financial situation, but the good news is that reviewing all of the options available will help you to choose wisely. For guidance on the best option for you, or more information on a bridge HELOC from BankFive, contact our mortgage team today.