Buying a home is stressful enough in today’s housing market. Try adding the extra pressure of selling your current home, too.
Many homebuyers face this two-step transaction, whether they are relocating for a new job, upgrading to a new home or downsizing in retirement. Last year, 89% of repeat buyers sold or planned to sell their previous home, according to the National Association of Realtors.
The key is to understand how the market is going, know your financial limitations and have plans for bumps in the road ahead of time, real estate experts say.
“It’s a balancing act,” says Susan Staffordsmith, a real estate agent with CENTURY 21 Action Plus Realty in New Jersey. “It’s our job to make sure clients minimizes costs. They don’t to pay for moving twice or for storage. These things can add up to the thousands.”
Here’s what you should know.
Can you carry two homes?
The first question that sellers who also want to buy should answer is: Can you afford to carry two homes if you don’t sell yours first?
Those who expect to get a mortgage for the second home and have one already on the first must be able to manage the potential monthly payments of both homes. If it’s too much debt relative to your monthly income, the mortgage lender won’t approve the second home loan, says Pava Leyrer, chief operating officer of Northern Mortgage Services.
“The lender can’t ignore the house just because it’s listed for sale,” Leyrer says.
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If you do qualify for a new mortgage while carrying your old one, you must make sure that you’re comfortable with the idea that you could end up with double payments. Some buyers don’t want that risk, while others are willing to make that gamble.
“In the markets that are superhot where homes are flying off the shelves, people are more open to carrying two homes],” Leyrer says, “because they are anxious about not getting the home they really want.”
Do you need to tap the equity first?
Other borrowers may need the proceeds from the sale of their own home to fund the down payment or full purchase of the second home. If you can qualify to carry both mortgage payments but require the equity in your first home to buy the second, there are two possible options, Leyrer says.
Pull equity out: You can get a home equity loan or line of credit from another bank that can be used toward to the down payment.
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Smaller down payment: You could also put down less than 20% and have your home loan modified later. A modification doesn’t change your rate, but can lower your monthly payment. It’s also less costly than refinancing. Double check the lender will do this ahead of time before banking on it.
If these options don’t work for you, then you need to sell your home first.
Get your home ready for sale
If your old home is what stands in the way of buying your new one, it’s time to get serious about selling, agents say. If possible, move out, so the home can be staged for sale. If not, declutter, refresh with new paint and fix any issues before putting a for-sale sign up.
It’s also important to avoid overpricing your property, which could make selling it even harder, says Leon Robinson, an agent with Coldwell Banker Residential Brokerage in Baltimore.
“It will sit on the market and people will start to think there’s something wrong with it,” he says. Even if you get a higher price, it still must appraise for that price for the buyer to get a mortgage.
“If the market doesn’t bare that price, then you have to turn around and renegotiate the price,” he says.
Don’t hamstring your offer
Like any homebuyer in today’s market where sellers have more of an upper hand, any offer you put on the new home should come with a mortgage preapproval. Agents also recommend selling your first house before making offers on your second, especially if you’re planning to pay the full price on the next home.
“Then you’re a cash buyer in a seller’s market,” says Dona Crowder, a senior broker associate with Coldwell Banker Global Luxury in San Francisco. “You’re in the power seat.”
At the very least, wait until your house is in contract before making an offer on other ones. In many hotter markets, buyers are putting in bids that have few contingencies. Having a contingency that you must first sell your house makes your offer less attractive. If it’s in contract, then it’s a stronger offer.
Be prepared to allow a first-right-of-refusal for the seller if your offer comes with a home-sale or home-closing contingency, says Susan Staffordsmith. “If another buyer comes along, then you need to remove the contingency,” she says, or the seller can accept the second buyer’s offer.
Work with the same broker
If you’re selling and buying in the same general area, it might make sense to use only one real estate agent for both the sale and purchase of your homes. That way, the agent can accurately communicate to the listing agent of the second home what is happening with the first. This will make it easier to coordinate two closings, among three different parties – you, your buyer and the seller.
“You need to know where your buyer is coming from. Are they in process of selling their townhome?” says Diane Notarfrancesco, an agent with CENTURY 21 Action Plus Realty. “It can snowball and affect the last person in the transaction.”
Have plan B
A big worry for the seller-buyer is the timing of the two transactions will be off, and one of two consequences will occur: Two homes at a time or nowhere to live.
Sock away one to two times the monthly mortgage payment for your first home in case you end up carrying both homes for a while. That extra money can be used for a short-term rental from AirBnB or VRBO if you haven’t found a home fast enough after selling your first.
Another option to avoid couch-surfing: a post-sale occupancy agreement with your buyer. This allows you to stay in your home for a specified period after the sale closes. Typically, part of the funds from the sale are held in escrow as a security deposit for the buyer, who is now the new owner. You receive these funds after the rental period is up and new owner assesses there is no damage to the property.