When it comes to how to sell and buy a house at the same time, what’s critical is getting the timing right. If you can’t, you may end up with two mortgages — one for your new home and one for the current home you’re trying to sell. Plus, then you can’t use the proceeds from the home sale toward costs such as the down payment on your new house.
With some planning, however, you can get strategic in buying and selling a home at the same time so you’re not stuck with two payments.
Buying and selling a home at the same time: How does it work?
Buying a home is stressful on its own, but the situation can become that much more difficult when you’re selling simultaneously. That’s because when you sell and buy a house at the same time, you need to time both transactions well. Ideally, you’ll negotiate the closing of your home sale around the same time as you move into your new home.
On top of that, you’ll also need to coordinate with a lender to prevent any delays between transactions. To time the sale and purchase of your home, a real estate agent will typically work with you after you secure financing.
Here’s a typical timeline for homeowners who are buying and selling a house at the same time:
- Make necessary repairs and arrangements to prepare to sell the current home.
- Work with an agent to look for a new home.
- Negotiate and sign a purchase contract for a new home.
- Put the current home on the market and indicate a closing date that coincides with the closing date of the new home purchase.
- Close on the current home on the day (or within a few days) of the new home’s closing date.
Preferably, the purchase of the new home will occur within a few days after selling the current home. That way, you won’t have to worry about two mortgage payments, and you won’t risk needing to pay to store your belongings and get a hotel while you’re waiting to move. If you can’t time it right, the move could end up costing you more, whether it’s for multiple home loans, storage facility rentals, or even a short-term housing rental.
A major challenge when it comes to selling and buying a home at the same time is financing. Most homeowners want to use the proceeds from selling their home to pay off their current mortgage and then use the money left over to put toward the new home.
Until that money lands in your bank account, however, you’ll need to find a way to come up with the funds to purchase a new home. It may be possible to dip into your savings accounts, but that might not be a realistic option.
When you’re trying to figure out how to buy and sell a house with no money in hand from your home sale, there are a few financing options to consider:
- Bridge loan: This is a type of short-term loan where you can borrow up to 80% of your current home’s value to pay off your old mortgage and use it toward a down payment for your new home. Bridge loan terms are usually around a year, and you make interest-only payments until you sell your current home to pay off the principal balance. Keep in mind that bridge loans may have higher interest rates compared to traditional mortgages. Still, a bridge loan could be a smart choice if you can’t sell your home in time to pay for a new one.
- 401(k) loan: Depending on your provider, you may be able to borrow against your retirement account to make a down payment on your new home. You’ll owe interest on your loan, and you’ll have to pay it back according to the predetermined payment schedule. If you’re late or default on payment, you could risk paying penalties and taxes. Also keep in mind that this is money that was intended for your future retirement, so borrowing could set you back in your retirement savings plans.
- Low down payment mortgage: Some lenders offer low down payment options, giving you a more affordable way to purchase your next home. That way, if you can’t close on your old home on time, you can still afford to close on the new loan. Once the sale of your old home closes, you can apply the proceeds toward the new mortgage. Depending on the lender, you can recast the loan, which means the lender will update your amortization schedule, potentially reducing your monthly payment.
As you can see, selling and buying a home at the same time requires a lot of paperwork and time, whether that’s filling out application forms for bridge loans, touring potential new homes, or making repairs before listing your current house.
Buying a house before selling
Buying a house before selling may be a smart idea if you want an easier move — ideally, you won’t have to worry about arranging housing if you sell and have nowhere to go. Buying before selling can also allow you to take your time moving into your new home. It might also be a smart idea if you’re moving to a new city or state on a certain timeline and want to ensure you have somewhere to live before you move.
However, the main downside of buying a new house before selling the old one is the financial resources. As mentioned before, you’ll need to come up with a down payment and closing costs for the new home, pay for the upkeep and maintenance, and cover the mortgage payments for both places until your old house sells. All of these costs can get expensive, especially for those on a tight budget.
Plus, if you buy a house first, you could run into difficulties getting a new mortgage. Since you have existing debt, lenders will factor the mortgage into your debt-to-income (DTI) ratio, which compares your income to your current debt. If your DTI is too high, it may decrease your chances of qualifying for a loan, or for securing an amount that’s enough to cover your new home.
There are, however, a few strategies that could make the process a lot smoother when it comes to how to buy another house while owning a house:
- Include a loan contingency clause: You can submit a sale contingency when you submit an offer on a new house. This contingency clause states that your offer is contingent upon the sale of your current house. That means if your house isn’t sold by a certain time, then you can back out of the purchase contract without any repercussions. Especially in a seller’s market, the seller may not agree to these terms, so it’s best to come up with a backup plan in case your offer is rejected.
- Rent out your old house: You can rent your old house as a short- or long-term lease once you move out. This could be a smart move if you’re not sure when you’ll be able to sell your old home and want some income to pay the mortgage on your new home.
- Use a bridge loan: As mentioned above, bridge loans can come with higher interest rates, so it’s best to crunch the numbers before going this route. Still, a bridge loan can offer coverage in the interim when you’ve purchased a new home and have yet to sell your old one.
Selling your home before buying another
Selling a house before buying another might be a good choice if you want to make sure you have the cash to put down on a new home. It can lower the financial pressure by alleviating concerns about how you can afford loan payments.
However, you’ll still need to find a place to live. Getting temporary housing like a short-term rental can work, but it could be stressful moving multiple times — especially if you have multiple family members, dependents, and even pets. Don’t forget that you’ll also need to find somewhere to store your belongings while you find a new place to live. Those costs can add up.
Here are some strategies you can use so that you’ll better know how to sell a house with a mortgage successfully:
- Arrange a “rent back” agreement: You may be able to remain in the home after closing by renting the home from the new owner, usually up to a maximum of 60 days. However, the buyer may not agree to this, so you may end up needing to find other arrangements. Or, if you can’t find a new home after 60 days, you’ll have to find alternate accommodation.
- Budget for storage: You’ll most likely have to pay for a storage unit to house your belongings, so factor that into your budget. It might also be a good idea to budget for temporary housing until you close on a new home.
- Get preapproved: Working with a lender before you look for a new house could help you close on a loan faster, shortening the gap between selling and buying a home.
- Come up with a list of must-haves for a new house: Start narrowing down homes in select neighborhoods as well as deciding which features you’ll want for your new home. That way, you may not have to tour as many homes before finding the right one, helping you move into a place much sooner.
If you’re starting to think about buying or selling a home, talk to a local Finance of America Mortgage Advisor today to ask questions and get guidance.