Selling your home and buying another home at the same time is the ultimate feat in multitasking and comes with a tricky timing challenge.
If you have a mortgage on your current home and buy a home before it sells, you can get stuck with the loan payments and upkeep costs for both properties. If you sell your home before buying it, there may be nowhere to go after the sale is complete.
But with planning, the right financing, and strategic pricing and negotiation, you can plan the sale and purchase the way it works for you.
Here are some strategies to bring it together.
Create the conditions for buying and selling
There’s a lot of prep work going on to buy and sell, so prepare for both as soon as possible.
“The more you plan, the more you will be prevented from making big mistakes,” said Brian G. Smith, vice president of national business development for Union Home Mortgage in Ohio.
Get ready to sell
A good Listing agent can offer advice on how to prepare your home for the market.
That includes doing any necessary repairs to remove red flags for buyers, as well as tidying and cleaning, says Joey Sheehan, an agent at Berkshire Hathaway HomeServices Fox & Roach, Realtors in Bryn Mawr, Pennsylvania.
“Almost every home is cluttered from a sales perspective because selling a home is a very different activity than living in it,” says Sheehan.
After tidying up and clearing out the house, you should finalize photos and videos of the house so that those materials are ready when you want to advertise the property, recommends Christian Ross, managing agent for Engel & Volkers in Atlanta.
Get ready to buy
“Number one is to make sure that your finances are in order. A lot of people say, ‘Oh, I know I have great credit. I know I can be admitted, ‘”says Ross. “But the credit guidelines change every day.”
To get a quote in today’s hot real estate market, you must either have cash to buy it outright or get full pre-approval for a mortgage to finance the home without a lender meeting any conditions that your existing home needs first have to sell.
“The pre-approval process for all borrowers should really begin before they get in and start looking for a home,” said Brian Blonder, senior vice president of mortgage sales at Capital Bank, Maryland.
This is how money works
If you sell your home, you will likely use the proceeds to pay off the mortgage and then use the remaining money on the next property.
But until that sale is complete, you will need to raise cash for a down payment and set up the financing for the purchase of the next home.
Some homeowners tap into savings accounts for the down payment on the next house. But not everyone has a strong balance to do that. Here are some other options.
Line of credit for home equity loans
You could a. use Home Equity Line of Credit, or HELOC, on your current home to withdraw cash for the deposit. But you must have already installed the HELOC; a lender won’t approve the line of credit after you’ve marketed your home, says Blonder.
Don’t wait until the last minute to apply if you think you could one day use a HELOC to fund your next purchase. Smith says line of credit approval can sometimes take longer than an initial mortgage.
With a Bridging loan You can borrow up to 80% of the value of your home to pay off the old mortgage and use the remaining money to pay a down payment on another home. Or you can use a bridging loan as a second mortgage to take out part of your equity against a down payment.
You only make interest payments on the loan and the maximum term is usually one year. Typically, however, bridging loans are paid off much faster as they are designed to fill the short gap between buying an old home and buying a new home.
Due to the short term, the interest on a bridging loan is a few percentage points higher than on a regular mortgage.
Some applicants who are approved for bridging loans do not even need to take them because the sale will eventually be completed before the purchase.
401 (k) or other investment account loan
You can borrow against an annuity or other investment account to receive cash for a down payment. For example, a 401 (k) loan allows you to borrow up to half the balance or up to $ 50,000, whichever is lower, at reasonable interest rates.
The advantage of borrowing on an investment account is that lenders don’t count this loan as debt when calculating your debt-to-income ratio for a mortgage pre-approval, says Blonder. Ideally, you should pay off the loan on your investment account as soon as your home is sold.
Just make sure to stick to your plan to repay the loan after the old house is sold and avoid the temptation to use the money on other things. The failure of a loan from a 401 (k) account can trigger taxes and penalties.
Low down payment mortgage
One option is to take out a conventional, low down payment mortgage to buy your next home. When the old home is sold, apply the proceeds to your new home and have your mortgage rewritten.
When the loan is rewritten, the lender applies the lump sum payment to the lender and executes the Depreciation planthat shows how much of each payment is used for interest and how much is used for debt reduction. Recasting the mortgage lowers your monthly payment and is less costly and easier than refinancing a mortgage, says Smith.
But plan ahead. Not all lenders offer mortgage recast. And this service is not available for government backed loans like FHA, USDA, or VA loans.
A new way to buy and sell
A variety of newer companies such as Homeward, Knock, Opendoor, Orchard, Ribbon, and others are reshaping the way they buy and sell homes. Their services vary, but generally they offer financing so you can get a cash offer on your next home before finalizing the sale of your existing home – and avoid paying two mortgages at the same time.
At Homeward, for example, you will be approved a mortgage and you will work with the company to come up with a cash offer for a new home. You can use your own lender or the company’s lending partner, Homeward Mortgage. If your offer is accepted, move into the apartment after the purchase is complete and list and sell your old apartment. While you wait for your old home to be sold, rent your new home with Homeward for up to six months. If your old home doesn’t sell within six months, Homeward says it will buy it from you. Once your old house is sold, close the new house.
These companies now form part of the real estate market and are only active in certain markets. So you need to check that their services are available in your area, that you and your property qualify, and then compare the costs with those of the traditional route.
Find the right time
Once your financing is complete, a real estate agent can help you plan the sale and purchase. One way is to negotiate the close dates so that they work best for you.
“It’s not that hairy if you really think it through and organize everything properly,” says Sheehan, author of “Open House!”.
Here’s how she’s helped her clients bring everything together on the same day:
- Your clients prepare their home for sale and then buy a new home.
- Once they have a purchase agreement and the inspections and negotiations are complete, they put their current home on the market and provide a billing date that coincides with the purchase.
- The sale of her old house closes the morning after all of her belongings are in the moving van.
- The shop closes in the afternoon and they move in.
If the sale ends a day or more after the sale closes, you need a place for yourself and your belongings. If it’s only a day or two, maybe stay with friends or in a hotel and keep your belongings on a moving van.
But if it takes much longer, you can negotiate a rent-back agreement with the buyer. These agreements typically have a maximum duration of 60 days, but are often only used for a few days to give sellers some flexibility, says Ross. In today’s competitive market, some buyers are offering to let the seller stay for free.
Just be aware that there may be disputes over rent-back arrangements. For example, what happens if the former owner drills a hole in the wall? Your real estate agent can assist you in drawing up the contract and include the language in the contract to protect both parties.
Can’t Finance Before You Sell?
If you can’t qualify for financing a purchase until the sale of your first home is complete, Ross says you should plan where you will live after the property is sold and until you find a new home. In today’s market, it can take a few months to find a home and win a bidding war. She recommends looking for a rental property with a short-term lease or a rental property with a month’s notice.
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Barbara Marquand writes for NerdWallet. E-mail: [email protected]. Twitter: @barbaramarquand.
The item Here’s how to buy your new home while selling your old one originally appeared on NerdWallet.