The Finances Of Selling Your Home While Buying A New One
Buying and selling a home at the same time can be complicated. You need to figure out your timing, wade through tons of paperwork, work out financing –the list goes on. If you want your home sold so you can get the cash to buy a new one, it can certainly be stressful.
Ideally you can close on both properties on the same day so you’re not paying any more than you have to. However, it might be that you close on a house and then begin the process of selling one, but the financials may not make sense to you. While you can’t control the entire process, there are some general things you can do to make it as smooth as possible.
Weigh All The Pros And Cons Of Buying A Home Before Selling Yours (And Vice Versa)
Part of figuring out the finances of selling and buying a home at the same time depends on what you intend to do. Will you buy a home before selling or the other way around? Whichever option you choose, you’ll want to see how much your home could sell for as this could help you figure out a budget for the new home. It might be a good idea to get an appraisal or inspection to see if there are any ways you can increase the value of the home or if there are repairs you’ll need to make before listing your home.
Once that’s complete, figure out how much existing equity you have by subtracting what’s left on your mortgage from your current home’s market value. This amount can go toward a number of items related to your home but you won’t be able to use it until after your home sale is officially closed.
Here are some points worth considering when deciding whether to sell your home before buying and vice versa:
Selling Before Buying
- You may be able to use existing home equity to put towards your new home purchase.
- You might need to consider higher moving costs if you need to find temporary housing between homes.
- You’ll know how much equity you have to put toward your new home.
- You might need a temporary housing situation if your home sells before you find a new one.
Buying Before Selling
- You can move into your new home without worrying about temporary housing.
- If you negotiate a rent-back provision (when you sell your home on the agreement that you can rent the house from the new owners for a certain period of time), you won’t feel pressured to buy a new home right away.
- You may not have enough cash up front (unless you consider a bridge loan) to put down a competitive offer on a new property.
- You could find that contingent offers on your existing home means less desirable offers.
- If you feel rushed to sell in order to use your existing equity for your new purchase, you may end up taking a lower offer.
Crunch Your Numbers
It’s time to know your numbers. Reach out to both your mortgage lender and your financial planner to see what’s feasible based on your financial situation. The amount of liquid cash, the amount of equity in your home and the loan products you qualify for can all factor into which path you take.
Understanding your numbers is important so you know how much money you need for both homes and when. Whether you sell your home with or without an agent, you want to know what types of fees you could be paying.
For example, if you decide to sell your home without an agent, you’ll need to consider closing costs and other fees like the ones you’ll pay a real estate attorney or the ones to list your home on a multiple listing service (MLS). If you need to make repairs before listing your home, you’ll need some cash set aside to take care of them.
In all situations, you’ll need to have a down payment for the new house. How much that will be depends on whether you intend on using the proceeds from your house sale to fund the new house.
Other considerations include moving costs and gap housing. Moving may not cost a lot, but it can be expensive to find temporary housing between selling your home and closing in on a new one.
Let’s say you want to sell your home first before looking for another one. In the meantime, where will you live? You can find temporary housing while you look for a new house, meaning you’ll need to come up with funds for that even if you negotiate a rent-back provision.
Once you take all these factors into consideration, come up with an approximate budget and decide whether you’ll need to take out a loan temporarily to cover some of the costs.
Determine If You Need A Personal Or A Bridge Loan
If you find that you need a little financial help, you can consider a personal loan or a bridge loan. A personal loan is an unsecured loan that you can use for almost anything, such as moving-related costs. Rates can be fairly favorable, but it all depends on your creditworthiness. This includes your credit score, income and other existing debts. The good news is that personal loans can be for small amounts (sometimes as low as $1,000) all the way to large ones.
However, a personal loan is generally not allowed if you need funds for a down payment. On the other hand, a bridge loan is a short-term loan that’s offered by a bank specifically to cover a down payment for your new house until you receive cash proceeds when closing your existing one. If this is something you’re interested in, you’ll need to speak with your lender as soon as possible because not all financial institutions offer bridge loans and it can be hard to qualify for one.
Don’t Rush It
Buying and selling a home can be a nerve-wracking process, but don’t let fear and anxiety guide your decisions. Avoid feeling like you have to accept the first offer that comes in because you want to access your home equity quickly or feel pressed to pay for two mortgages. Likewise, don’t compromise heavily on the type of home you want because you need housing –there are always short-term rentals.
At the end of the day, considering and planning for any upcoming challenges and risks can help lessen the stress that may come with this major life transition.