We are a few days from closing escrow on our old home, which means that our house would be sold by the time this article is published.
Selling the house during a pandemic took way longer than we thought. Aside from the ordeal being financially painful, I had quite a bit of anxiety while the house was sitting on the market. I was extremely nervous even after we accepted the buyer’s offer because he was self employed and he was trying to qualify for a loan on top of carrying a mortgage on his old place.
Luckily, the buyer must be making quite a bit of money because the lender approved them for this additional loan too and he’s about to sign the loan documents shortly.
I didn’t think much about this problem before, but how do most people move from house to house without moving to an apartment first? My buyer is making enough money to cover two houses, so he can just take his time while he moves. How does he do it though? I did some research and here are five ways people come up with the money.
1. They refinance their old place to get more cash out. Theoretically, you agree to stay in the home for six months (some agreements say one year) after a refinance, but my agent told me that some loan officers can get around the requirement. I guess applying for a mortgage on a new home doesn’t absolutely mean you are moving out of the old one, but this is potentially a gotcha to address.
2. The buyer can also use a HELOC. Similar to refinancing, a home equity line of credit on your old home will give you access to cash for the down payment. Just make sure you understand that interest on the line is not tax deductible if you are going to use it toward a new home purchase.
3. A 401k loan could work too. One of my readers told me that he took a 401k loan to buff up his cash reserves. Traditionally, you can take up to $50,000 for a home purchase. During this pandemic, maximum loan amounts are increased to $100,000 this year.
The pandemic changes a few other rules for 401k loans this year though, so learn about the details here if this is your plan.
Okay money is lined up, what else do I need to watch out for?
You are basically qualifying for two mortgages, which means that you need to survive on paying both until you sell your old house. Here are a few mental preparations you need to make.
Don’t assume your house will sell quickly. No matter how desirable your house seems to be and how hot the local housing market seems to be, you need to make sure you are prepared for your house to sit on the market for a while. Even if the house sells the day it’s listed, you are still on the hook for all expenses during the typical 30 days the house is in escrow.
The lender will qualify your new mortgage assuming you own both houses forever. This means that they will assume you pay property taxes, home insurance premiums on both properties on top of mortgage payments. Before you take the plunge, make sure you factor in all expenses and let the lender know about your financial situation when you are getting a preapproval letter from the lender.
The more agents you use, the more coordination you’ll need. A typical real estate transaction has two agents. With two houses and two transactions, you could have four, and maybe more if one set of agents is really a team who share responsibilities. As you can see, the number of people who need to be updated on all the details can quickly balloon if you don’t actively try to limit the number of agents involved.
It’s always a good idea to have a separate buying and selling agent in each transaction, but you may want to use the same agent to sell your old home and buy the new home to reduce the number of emails and text messages that you need to send to everybody. If you negotiate right from the beginning, you could probably ask for reduced commissions by giving the agent more business.
What if I can’t make this work? Does it mean I can never move up?
No, of course not. Plenty of people move up the property ladder without ever holding two mortgages at once. How do they do it?
Some people move into a rental first, but that’s not ideal since you have to move twice. The other option is to put in an offer on your dream home contingent on you being able to sell your place in time. I imagine no seller likes this, but if that’s the only offer on the table and the property has been sitting on the market for a while, then I can’t imagine sellers flat out rejecting it either.
If you decide on this route, then a good real estate agent is key, because you need someone who’s done this to be on top of all the moving parts.
As each delay in the closing of your old place is going to push back the closing of your new house, an agent who’s not only very good at negotiation but also amazing at de-escalating tense moments can be worth his/her weight in gold. The last thing you want is the seller of your next dream home to ask for more money every time you ask for an extension.
A third option is to sell the old place and see if the buyer will let you rent the place from them while you look for your dream home. This option is very similar financially to moving to an apartment first, only that you don’t need to move twice. Most buyers will want to move into a new home they just bought, but you’d be surprised how many are willing to move in later for some additional income.
It may seem impossible, both logistically and financially, to climb up the property ladder without moving into a rental first, but agents help homeowners coordinate the switch all the time. Explore these options and good luck on your move!
Have you bought a new home before you sold the old one? How did you make it work financially?
Originally posted at https://moneyning.com/housing/how-to-buy-and-sell-a-home-at-the-same-time/