This is a guest post from Kevin Mercadante of Out of Your Rut. Kevin is a former loan underwriter, and also author of Lighten Your Load, an e-book focused on reducing living expenses while still maintaining a comfortable lifestyle.
The housing market has been down for two years or more in much of the country, but many home buyers are continuing with the practice of buying a new home before selling the old one. While this was a common practice a few years ago in a stronger market, it makes little sense now.
Selling a house in this market is substantially more difficult than buying a new one.
If you insist on delaying the sale of your current home until you put a contract on a new one, then you’ll face the very real possibility of carrying house payments on two mortgaged properties at the same time. This is a situation that should be avoided at all costs in this market.
The downside of the real estate double deal
Below are some common entanglements you might face by not selling your house before buying a new one.
Qualifying for a new mortgage. A mortgage approval is much harder to obtain when the potential exists for carrying mortgages on two houses. Your lender will be aware of the situation, and may be less flexible in your terms. Either that, or they might not approve your loan at all. Since most buyers purchase at the upper range of affordability, the possibility of carrying two properties may be viewed as an unacceptable risk.
Sale of prior residence clause. If the lender wants you to sell your current home before closing on the new one, they will add this condition to your approval. Real estate agents donâ€™t like it, and sellers like it even less. It makes the closing on your new home contingent on the sale of your old one â€”- a deal dependent on another deal. If your lender requires the sale of your current home, your offer on a new home may not be accepted.
The Simultaneous Close. This is typically the most desired outcome. You close on the old and new homes on the same day. This is the perfect world outcome, but much more difficult to pull off than most people think. Itâ€™s very stressful on all parties, and can be sabotaged by a laundry list of potential issues with EITHER transaction. This is the classic, “it ainâ€™t over until itâ€™s over” trap, that may cause sleepless nights and significant delays in closing.
Wiping out your liquid assets. There are numerous expenses that accompany the purchase of a new home that donâ€™t show up on a closing statement. Costs of the move, new furniture, minor repairs to the new home and the â€œwhoops, we didnâ€™t know we would need to buy (or fix) that!â€ Now add an extra monthly mortgage payment to the mix, and how long do you think your liquid assets will hold out?
A forced rental situation. Renting out your old house to cancel the payment on it might make sense short term, but having tenants will make it much harder to eventually sell your house. Your tenant might not be open to real estate agents showing the house, and also might not keep it in salable condition.
Foreclosure. Carrying two mortgaged properties simultaneously is a major cause of foreclosure. Even if nothing goes wrong, the double payments might prove to be too much for you to handle.
Common reasons for not selling first
Over my many years in the mortgage industry, Iâ€™ve heard the following offered as reasons for buying the new house before selling the old one.
“My house is in (pick one) top condition/a top neighborhood/a top school district, so itâ€™ll sell fast.” Most home sellers arenâ€™t objective when assessing the salability of their homes, and tend to be overly optimistic. Note: seller optimism is not a factor in the marketability of your house.
“I donâ€™t want to make a double move.” A double move is a temporary problem, and one you have some control over. Itâ€™s not uncommon to go a year or more carrying two house payments! That’s serious money.
“We might not be able to find another house quickly if we sell ours first.” For all the same reasons itâ€™s difficult to sell a house in today’s market, itâ€™s much easier to buy one.
“What if we sell our house, then canâ€™t get a mortgage for one that we want to buy?’ You can and should obtain a mortgage pre-approval before entering into any home buying situation, so the risk here is remote at best.
The unspoken fear of being homeless. Okay, Iâ€™ve never actually heard this one, but I suspect that (perhaps in the dark of the night) people might have a pang of fear that selling their house before buying a new one could leave them out on the street. Given that you’ll have a loan pre-approval before doing anything anyway, this isn’t something to be feared — especially not in this market!
Simply getting a contract offer on your house isnâ€™t always sufficient. Contracts can fall through for more reasons than you can imagine, as can the buyer’s mortgage approval. The cleanest way to enter the purchase of a new home is to fully dispose of the old one first. Below are some suggestions on how to accomplish this.
Before using any of these suggestions, it is strongly recommended that you first consult a qualified real estate attorney in your area as laws and practices vary by jurisdiction.
Sell your house with a delayed closing date. You can accept a contract on your current home and set the closing date 30, 45 or 60 days from receipt of a contingency-free mortgage approval from your buyer. At that point, you’ll have a solid buyer as well as time to find your new home, and you may be able to pull off the coveted simultaneous close.
Add a short-term rental provision to the contract on your current home. Add a clause to the sale of your old home that permits you to stay in the house as a rent-paying tenant for 30-60 days following the close. Use this time to secure your next home. Youâ€™ll avoid a double move, have the cash from closing in hand, and can make a clean offer on a new property.
Move into an extended stay hotel and put your furniture in storage. This requires a double move, but also eliminates the uncertainty pf being able to sell the old home. It also makes your a more attractive buyer. Yes, it will cost more, but it’s a solid defensive strategy that guarantees you won’t be stuck with two mortgages.
Sell your house, and take a lease purchase on a new home. This strategy also enables you to sell your old home and enter the market as an unencumbered buyer. You get a chance to “test drive” the new house and neighborhood, and you avoid the double move. There are now more lease purchases available than there have been in recent memory, and one might imagine that any property thatâ€™s been listed for sale for more than a few months might be a candidate for such an offer even if it’s not being presented as such by the sellers.
No doubt any of the above will create some problems, but youâ€™ll be accepting smaller, short-term problems rather than risking larger, more costly problems later.
Do you know of anyone whoâ€™s been trapped with two homes for more than a couple of months? Are you in this position now?