It’s one of the more common questions buyers and sellers ask themselves: should I buy or sell first?
This can be a hard decision to make, especially if you fear being stuck holding two homes – and therefore two mortgages – if selling ends up taking a lot longer than you thought.
On the other hand, buying first may provide you with the peace of mind knowing what’s ahead of you and won’t put you in the position to feel rushed to find the right home after you’ve sold. It’s nice knowing that you’ve already got a home that has everything you need waiting for you when you sell your current property.
Of course, an argument could be made for both cases, but there’s really no right answer as to which one should come first if you’re in the right financial position. Buying before selling will help ensure you’re not left stranded without a home if the two closing dates don’t coincide, while selling first will help you avoid the possible position of having two mortgages to cover at the same time.
That said, the California housing market is a hot one right now, and with demand outweighing supply, now may be a great time to find your new home before selling the one you presently own.
If you’ve decided to buy a new home first before selling your current dwelling, there are a few tips you should consider to make the process a lot more streamlined.
Get a Handle on the Current Market in Your Area
As stated earlier, the real estate market across the Golden State is sizzling. The lack of inventory coupled with high demand has favored sellers for a long time, which means you likely won’t have any problems finding a willing buyer if you’ve got the goods that people are looking for and have chosen the appropriate listing price.
But every specific market varies somewhat, so it’s a good idea that you fully understand your exact market in your community and find out how much it favors sellers over buyers, or vice versa. It’s also a good idea to get familiar with the market that you intend to buy in to be able to come up with a sound strategy.
Be sure to get a professional appraiser involved and price your old home appropriately according to the current market in your area. Just because it may be a seller’s market doesn’t mean you can inflate the listing price as you please in an effort to squeeze out as much money from a buyer as you think you can.
Doing so could place you at risk of having your listing linger on the market longer than you’d like it to. And the longer it sits on the market, the longer you’ll be stuck paying a mortgage on it.
Take a Good Look at Your Finances
Before you make the decision to buy first before selling, it’s critical that you take a long and hard look at your finances and be realistic about where you presently stand. Buying first may give you the benefit of taking your time finding your next dream home, but it also comes with the risk of holding two mortgages should the overlap between closing dates be quite large.
In addition, buying another house while still holding onto your current home will increase your debt-to-income ratio. Not only will this make it more difficult to get approved for another mortgage for your new home, it will also put more pressure on you financially to handle another mortgage payment.
Be prepared for the possibility of having to pay two mortgages, and make sure your financial position is strong enough to accommodate for this.
Consider Potential Solutions to Cover Financial Predicaments
The decision about buying first before selling shouldn’t be made until you’ve determined a potential solution in case you end up carrying two mortgages for longer than you wanted to or if your home sells for less than what you expected.
Luckily, there are a few options that you may want to mull over so that you’ve got a Plan B should things not go precisely according to plan.
Apply for a bridge loan – Taking out a bridge loan is one of the more common financial solutions that borrowers seek when the new home they’ve purchased closes earlier than the one for the property they’re selling. A bridge loan allows you to own two properties at the same time by combining the payments of both homes together if you don’t have enough funds to cover a second down payment.
This arrangement essentially serves as a short-term loan that will be paid back when your current home eventually sells. However, it should be noted that bridge loans typically require borrowers to have stellar credit and hefty finances.
Rent out your home – In an effort to get some financial help covering two mortgages, you could consider temporarily renting out one of the properties until you’ve been able to find a buyer and close a deal. The rent you collect can help cover some of the bills you’ll still be responsible for.
That said, it’s important to be aware of the potential issues that could come with this strategy. For instance, the renters may cause some damage or neglect to leave the home in showing condition if you rent out your current property.
In addition, the renters might want to keep living there and make it even more difficult to show the house as a result. Further, your lender will only count a part of the rent collected when qualifying you for two mortgages.
Add a contract contingency – There is always the option for you to add a clause into the contract for the home you are buying and make it contingent on the sale of your current home.
Keep in mind that most sellers will likely not agree to a contingency like this, and for good reason. They could be sitting around waiting for you to sell your home while they could be missing out on a plethora of other offers that would close a lot faster than yours. In a competitive market, this type of contingency is typically not recommended.
On the other hand, if the seller of the home you’re interested in buying is having difficulty attracting any interest, you just might find yourself with a deal.
The Bottom Line
In a perfect world, the closing dates of the sale of your current home and the purchase of your new home would line up. Unfortunately, that doesn’t happen often.
If you’ve decided to buy your next home first before selling your current one, make sure your finances are healthy enough to support a situation whereby you’re holding two mortgages if your current home doesn’t sell right away. Speak with your mortgage specialist and your real estate agent to help you make the right decision.