It can be stressful enough to buy a new home, but buying one while you are selling your old one takes some exquisite choreography and more than a little luck. It also takes a significant amount of planning to do correctly.
There are bad possibilities in either direction – you could buy your new house before the old one sells and be stuck with two mortgages, or sell your existing house before closing on your new one and end up without a home for a time. Either is nerve-wracking – but you can make things more tolerable by considering the following.
- Psychology – Of the two scenarios above, is one of them merely unpleasant to you while the other is intolerable? If you cannot bear the thought of scrambling for temporary housing, then skew your plan toward avoiding that outcome, or vice versa if you cannot handle two mortgages.
- Loan Qualification – The lender may make this decision for you – it is hard to qualify for a second mortgage on a new home unless you have significant equity built up in the old one and have sufficient income to cover payments in the short term. Remember, your debt-to-Income ratio would be figured on both homes until you sell the old one.
- Market Conditions – Is it currently a buyer's or a seller's market? Unless you are extremely fortunate, one or the other will be the case, and it will be harder to either buy the new home or sell the old one.
- Readiness – Pre-pack as many things as possible, and keep your old house in order during the transition. Deal with any necessary repairs before you execute your plan. The point is to be ready to move quickly when the opportunity arises.
- Scout New Houses – Regardless of the path you follow, it is wise to scout out your new home options before you consider selling the old one. Check the home values, and do some preliminary calculations to figure out whether you can cover a second mortgage for a short time. If it is not close, you should either wait for your upgrade or sell first.
- Negotiation –You may be able to convince a seller to make the closing contingent on the sale of your existing home – or vice versa if you are the seller and need to convince a buyer to wait. You may need a skewed market or some serious concessions on price to convince another party to agree to these terms. An accelerated closing is another option, although this will also come with some concessions.
- Temporary Housing Options – Review all your temporary options for housing – anything from putting your things in storage and staying with relatives temporarily to negotiating a rent-back arrangement (renting your old home from the new owners for a few months of transition). Consider that in a rent-back, the loan on your home is brand-new, and the amount of money you pay will be significantly higher than if you were dealing with your old loan.
- Bridge Loan – You may be able to get a short-term "bridge" loan to cover the gap – try with the same lender that you are buying through. However, these loans carry high interest rates and fees. You can also explore using your home equity; although once you start the selling process it will be nearly impossible to acquire a home equity loan.
- Alternate Gap Financing –If you have a 401(k), you may be able to borrow against that and fill the gap. You have a relatively short time to pay the loan back plus interest, but you really do not need a long time in this case.
Generally, your odds of success are better when selling your home first, as it is usually easier to buy a home than to sell one. If you choose to buy first instead, put your old home on the market immediately after closing on the new one. You can list your old home earlier if you prefer, but you run the risk of your new home purchase falling through prior to closing.
With shrewd negotiation skills, planning, and some luck, you can pull off an exchange that doesn't leave you with more mortgage debt than you can handle or with inadequate temporary housing. If not, at least you can minimize the pain of transition with well-researched contingency plans.