It’s housing’s version of the classic chicken-and-egg conundrum.
Which comes first: Do you sell your existing home before you sign a contract on a new house or do you buy that new place first and then put your old house on the market?
Obviously, the choice is a highly personal one, one which involves at least some degree of danger. If you sell first and can’t find a new house that fits your bill, you could be homeless. But if you throw all caution to the wind and buy your new home before you sell your current digs, you could be stuck with two mortgages.
Yes, those are distinct possibilities and there is always going to be a bit of nervousness, if not agony in whatever decision you make. The only time it’s not terribly stressful is when you are moving from a rental.
But there doesn’t have to be a lot of tension — not if you plot out your course of action.
There are always exceptions, but the popular wisdom among real estate professionals is that it’s usually most practical to sell first, then buy. If nothing else, they say, selling first puts you squarely in the driver’s seat, both coming and going.
For one thing, you won’t be facing any self-imposed deadlines. You can hold tight for the best possible price for your current home for as long as you want. If, on the other hand, you’ve already bought that new house, you could be forced to accept less than you need to make the next deal work.
“It could cost you thousands if you buy before you sell,” Dan Moriarty of RE/MAX Preferred in Greenwood, Ind., told me a few years back. “You are much more likely to take less for your house, especially if you are afraid” you will lose the new house to another buyer.
But that advice holds true mainly in situations in which you are buying an existing home. If that’s the case, you’ll be in a much better bargaining position. Sellers are far more likely to negotiate with a solid buyer who doesn’t have another house to sell or doesn’t have enough cash on hand to go to settlement unless he sells his current house.
Most sellers don’t like taking their homes off the market for a “maybe.” Some won’t even accept a contract that is “contingent” on the wanna-be buyer selling his or her current house.
But if you are purchasing a new home, one built from scratch on the lot of your choice to your own specifications, you should have plenty of time to sell your current digs after you’ve made your choices and signed the contract with the builder.
That’s not to say you still might want to sell first. In fact, during the most recent housing recession, that’s what most buyers did. But now that the downturn has ended and house values are rising in most places — or at least holding their own — “buyers are starting to put their homes on the market after they’ve secured their new homes,” reports Jeff Benach, co-principal of Lexington Homes, a Chicago-area homebuilder.
Benach reports that at least half of his company’s customers of late have yet to put their homes on the market — with little risk. “In this market, their current houses are going to sell within three months,” he says. “And since we won’t be delivering their new homes for a good five or six months, there’s plenty of time to sell. Most people can work with that.”
Of course, the vibrancy of your local housing market will go a long way toward allaying the fear of being stuck with two places. If houses are selling briskly, you should be in good shape — as long as you price your old place realistically. But if nothing is moving, then you might have to sell for less than you want — or need — to make the deal work.
The Mortgage Perspective
Now, let’s take a look at this from a purely mortgage lending perspective. Here, the question boils down to whether you have the income and funds to carry two mortgages. If you do, you are in great shape to jump on that new house.
Unfortunately, not many of us are so well endowed monetarily. So it comes down to qualifying for a mortgage on the new house while still paying the mortgage on the old house. To borrow from the good works of Charles Dickens, call it a “Tale of Two Mortgages.” And these days, the tale is much more menacing than it used to be.
According to Chris Carter of the Paramount Residential Mortgage Group in Naples, Fla., if your old house is not under contract at the time you apply for a loan to buy the new house, both the existing house payment and the projected payment on the new place must be included in your all-important debt-to-income calculation.
If your old house is at least listed for sale with a qualified real estate agent, the lender may accept reserve assets equal to six months of your existing house payment, Carter says. But he also points out that that would have to be in addition to the liquid assets you’ll need for a down payment and closing costs on the new place.
You can always wait to apply for the new mortgage until after you’ve closed on the sale of your old house, or at least until after you’ve accept a contract. That can cut weeks or even months out of the delivery time frame. And though many builders won’t even start construction until the buyer is qualified and approved for a mortgage, you should still have plenty of breathing room.
Then, too, it doesn’t have to be disastrous if you have to close on the new place before the old one is sold. While such a situation is, indeed, nerve-wracking, it’s not without its own solution: You can span the financial chasm between two mortgage payments with what’s called a “bridge” loan.
Sometimes called gap financing, bridge loans can run anywhere from 90 to 180 days. Generally, lenders will advance 76 percent to 90 percent of the value of your present house, depending on your financial situation, so you can complete the purchase of the new one.