Selling your home and buying another at the same time is the ultimate multi-tasking test! If you are making payments on your current home and you buy another before selling, you would be stuck making payments on two homes. If you sell before buying, you could have nowhere to go! But with planning and the advice of your agent, on top of the right financing and strategic pricing and negotiating, you can perfectly time the sale of your current home and purchase of your next.
Here are some tips and strategies to make this happen!
Prep work for buying and selling
Get prepared to sell
Your listing agent will help you prepare your house for the market, including repairs, decluttering, cleaning, and professional photographs and videos for listing.
Get ready to buy
The most important step is to make sure your finances are in order. Even if you think you have the credit and can get approved, lending is ever changing! Meeting with a lender is essential in getting the ball rolling. To get your offer accepted, you need to have either cash to buy or your financing lined up for a mortgage on the home, without conditions from the lender that your current home must sell first.
Making the money work + your options
When you are selling your home and buying another, you are likely going to use the proceeds to pay off that mortgage and the remainder to go toward your next purchase. However, until your home sells, you will have to have the money for the down payment and financing in line just like you would if you were purchasing for the very first time. This can come from many places. Here are some options.
Home equity line of credit
A home equity line of credit, aka HELOC, is an excellent place to draw cash for the down payment. However, the HELOC must already be in place, or before you’ve put your house on the market, or the lender will not approve the line.
Bridge loan
With a bridge loan, you can borrow up to 80% of your home’s value to pay off the old mortgage and put any remaining money toward a down payment on another home. Or you can use a bridge loan as a second mortgage to borrow a portion of your home equity for a down payment. You make interest-only payments on the loan, and the maximum term is typically a year. But usually, bridge loans are paid off much more quickly because they’re designed to fill that short gap between the old-house sale and new-house purchase. Because the term is short, interest rates are a couple of percentage points higher on a bridge loan than for a regular mortgage. Some applicants who get approved for bridge loans don’t even need to use them because the sale ends up closing before the purchase after all.
401(k) or other investment account loan
One option is to borrow from your retirements or other investment accounts to gather the money for your down payment. A 401(k) loan, for instance, lets you borrow up to half the balance or up to $50,000, whichever is less, at reasonable interest rates. The upside to borrowing against an investment account is that lenders don’t count that loan as debt when calculating your debt-to-income ratio for a mortgage preapproval, Ideally, you would repay the loan against your investment account as soon as your home sells. Just make sure you stick with your plan to repay the loan after the old house sells and resist the temptation to use the money for other things. Defaulting on a loan from a 401(k) account can trigger taxes and penalties.
Low-down-payment mortgage
One option is to get a low-down-payment conventional mortgage to purchase your next home. Then when the sale of the old house closes, apply the proceeds toward your new home and get your mortgage recast. When recasting the loan, the lender applies the lump-sum payment toward the principal and redoes the amortization schedule. Recasting the mortgage will lower your monthly payment, and it’s a less costly and simpler process than refinancing a mortgage. But plan ahead. Not all lenders offer mortgage recasting. And this service is not available for government-backed loans, such as FHA, USDA or VA loans.
Getting the timing right
Once your financing is in place, your agent can help you perfectly time the sale and purchase. One effective way is to negotiate the closing dates to work best for you.
Here is the typical timeline for closing both on the same day:
- Clients get their house ready to sell, and then shop for a new home.
- Once under contract to purchase and the inspection and negotiations are completed, you put your current home on the market and indicate a settlement date timed to coincide with the purchase closing.
- The sale of your old home closes in the morning, after all their stuff is on the moving van.
- The purchase closes in the afternoon, and they move in.
If the purchase will close a day or more after the sale closes, you’ll need a place for you and your stuff. If it’s only for a day or two, maybe you stay with friends or at a hotel and keep your belongings on a moving truck. But if it’s much longer, you can negotiate a “rent-back” agreement with the buyer. These agreements usually top out at 60 days. Just be aware that squabbles can arise with rent-back arrangements. What happens, for instance, if the former owner gouges a hole in the wall? Your real estate agent can guide you with setting up the agreement and including language in the contract to protect both parties.
Can’t finance before you sell?
If you can’t qualify to finance a purchase until the sale on your first home closes, plan where you’ll live after you’ve sold the property and until you find a new home. In today’s market it may take a few months to find a home and win a bidding war. Looking for a rental property with a short-term lease or one that lets you leave with a month’s notice is an ideal arrangement.
At the end of the day, having an agent on your side who is experienced is crucial and can save you time, money, and the trouble!
Information gathered from Barbara Marquand’s article on NerdWallet.com dated July 27, 2021 and titled How to Buy and Sell a House at the Same Time- https://www.nerdwallet.com/article/mortgages/how-to-buy-and-sell-a-house-at-the-same-time
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