When It’s Time to Move, Should You Buy or Sell First?
Buying your first home is typically pretty straight forward. Find a REALTOR®, secure financing, scope out homes, make an offer, and sign the papers. But when it’s time to move on from that first home, the process gets a bit more complicated. Should you sell your first home before you buy your next one? If you do, where will you live in between? Can you buy a new home before you sell your old home? If you do, how will you pay for it with your money tied up in your first home? It’s enough to make your head spin.
While conventional wisdom suggests you shouldn’t buy a new house before selling your old home, it is possible, although riskier than selling before you buy. To decide what’s right for you, consider the pro’s and con’s of each approach and then take the process step by step.
- Access to cash: Selling your old home before you buy your new home gives you cash in the bank. This means you’ll have funds available for a decent down payment and you won’t run the risk of having to pay two mortgages.
- The possibility of a better deal: When you’ve already sold your first home, you’ll have a clear idea of how much money you have to spend on your new home. And, without the pressure to sell quickly, you can make sure you’re getting a great price when you sell. On the flip side, going into a new purchase without a contingency to sell your old home can be very appealing to sellers.
- Less stress: With one deal behind you, you can focus on what lies ahead. Not having to worry about moving funds around, or paying two mortgages simultaneously, makes the path from moving from your current home to your new home much smoother.
- Extra unknowns: When you’ve sold your current home before you’ve bought your new home you’ll need to consider where you’ll live in the meantime. It can be stressful to find a temporary place to live. You may feel like a burden if you’re staying with friends or family and the pressure to find a new home quickly may cause you to make a rash decision.
- Additional costs: It’s unlikely that your temporary housing will be able to accommodate all of your belongings. You’ll need to budget for a storage locker while you house hunt. And, because you’ll actually need to move twice – from your old home to your temporary home and then into your new home – you’ll also need to budget for two sets of moving costs.
- Less of a time crunch: When you’re buying your new home while still living in your old home, you won’t have the pressure to move out of your temporary housing situation meaning you can relax and enjoy the home buying process. Plus, you’ll have peace of mind if your new deal falls through knowing you still have your old home to stay in.
- Only one move: If you wait to see your old home until you’ve bought your new home, you’ll only have to pack up your things and move once. This will eliminate the need to budget for storage and temporary housing. Plus, if your new home needs improvements, you can stay in your old home while those updates are made and your new home is move-in ready.
- Financing can be tricky: With your funds tied up in your old home, coming up with enough cash for a down payment, especially if you’re moving into a more expensive home, can be difficult. While there are ways to overcome this hurdle (see below), this is a big challenge many current homeowners try to avoid. In some cases, you may not qualify for a new mortgage if you have an existing one.
- Additional costs: If you’ve bought a new house before selling your hold home there will be a period of time where you’re paying two mortgages. Not only that, but you’ll also be responsible for two sets of taxes. Both of these scenarios should be budgeted for ahead of time.
- More stress: Figuring out financing can be a huge stressor. You also need to consider what to do if you don’t sell your house right away. You can rent your old home while it’s on the market to help cover some of your monthly payments, but being a landlord comes with its own set of issues. The pressure to sell might make you accept a lower offer on your home just to be done with it.
Deciding whether you want to buy first or sell first is just one step on the road to owning your next home. No matter which route you take, these steps will help guide you through the process:
- Assemble your team: With so many variables to consider and paperwork to manage, finding a skilled REALTOR® can eliminate a lot of stress and help you buy and sell with confidence. William Fastow, an associate broker with TTR Sotheby’s International Realty in Washington, D.C. told Bank Rate, “Working with a really experience REALTOR® makes a huge difference. There are a lot of moving pieces, so you want to work with someone who has a proven track record in your market and experience across both buying and selling.”
- Figure out your financing: In a perfect world, you’d have concurrent closings, selling your old home in the morning and closing on your new home in the evening. But things rarely go that smoothly. And, if you’re buying before you sell, you may have to get creative to free up funds. Darrow Wealth Management lists these six ways to finance the purchase of your new home while selling your old home.
- Home equity line of credit (HELOC) or home equity loans: Home equity loans are essentially a second mortgage that provides you with cash. Your lender can help you decide if this is an option for you.
- 401(K) loan: With some 401(k) plans, you’re permitted to take out a loan under the plan. Often, with this type of loan, your debt ratio isn’t affected because lenders see 401(k) loans as borrowing from yourself. However, if you’re taking out a large sum and won’t be able to pay it back quickly, this strategy may leave you worse off in the long run.
- Cash-out refinance: Similar to a HELOC, a cash-out refinance allows you to turn your current equity into cash. However, instead of placing a second lien on your home, this option pays off your first mortgage and sets you up with a new one. There are closing costs associated with a cash-out refi, so make sure you fully understand the terms before committing.
- Gifts: Who doesn’t love free money? If you have someone willing to assist you in the form a monetary gift, you’ll need to have the donor sign an agreement stating the amount won’t be repaid. You and your donor should speak with a tax professional since the IRS may tax the gift depending on the amount.
- Less than 20% down payment: You may be able to secure a loan without a 20% down payment. Standards vary by lender and state, so talk to a mortgage professional for guidance int his area.
- Use a sale-leaseback contingency: This is a common strategy used to negotiate a deal. Darrow Wealth Management states, “A seller may request a sale-leaseback to (literally) buy them some more time to purchase a new home after selling theirs.” The buyers and sellers must agree on the terms.
- Negotiate the timeline: Whether you’re selling first or buying first, working out a timeline that works for both the buyer and the seller is an essential part of a successful deal. Mark Pire, a REALTOR® with Berkshire Hathaway HomeServices in New Canaan, Connecticut says, “Making sure you can close on the same date is a huge part of negotiating our terms.”
- Expect the unexpected: Planning for the worst-case scenario allows you the flexibility to walk away from a deal you’re not happy with or bounce back if a potential buyer backs out with a minimal loss. Knowing that things might not go as planned and having an idea of how to deal with temporary housing, extra moving costs, or hold-ups with financing will give you peace of mind as you make your move.
Moving from your old home into your new home is a different process for everyone and what might be right for you may not be right for your neighbor. Working with a REALTOR® to understand your options and support you in the complicated process of buying and selling will help ensure you’re happy in your new home.