Regardless of the reason you’re moving, you’ll likely need to sell your first home while finding and buying your next home. Approaching your next home purchase using these three steps can have you feeling more comfortable with the process than you were as a first-time buyer.
Size Up the Market
First, you’ll need to consider the market you’re selling your current home in, as well as the market in which you’ll be buying. How are homes moving in the two areas? Is each a seller’s market or a buyer’s market? These factors will determine in what order you choose to buy your new home and sell your current one, as well as what sort of financing you’ll need.
- In a buyer’s market. A buyer’s market means there are plenty of homes on the market, at affordable prices. Some may have been sitting on the market for a while, giving you a broader selection of homes as well as more leverage when it comes to purchasing. Consider making a contingent offer on your new home, which means that your offer depends on your current home’s sale. A seller who has been waiting some time may be more likely to accept a contingent offer, especially if you are able to provide solid reasoning your current home will sell soon.
If a contingent offer is not likely, such as a difficult buyer’s market in your current neighborhood or city, you’ll need to make sure you can secure financing to purchase a second home before selling yours first.
- In a seller’s market. A seller’s market means there is a relative shortage of homes on the market and that homes are selling quickly, and at prices more favorable to the sellers. If you put your current home on the market in a seller’s market, it may sell before you are able to buy another, leaving you without a home while you proceed with the purchase of your new home. You may be able to use the funds from the selling price of your current home to pay for a rental or other temporary living situation while you house hunt in your new location.
Alternatively, you could choose to wait to list your old home until you find a new home, leaving you with two mortgages at a time. You’ll need to ensure you can secure financing for an second home mortgage. Another option is to negotiate with your current home’s potential buyer, to make the sale contingent on your finding another home. The buyers may or may not be willing to agree to an open-ended time frame, but in a seller’s market, many buyers are willing to accept alternative terms.
Whichever route you choose, you’ll need to secure financing for your next home. If you’ve chosen to buy first, you’re changing your debt-to-income ratio, which could affect your ability to finance the second home. Consider the following solutions to financing a second home:
- Bridge loans. A bridge loan uses your old home’s value as collateral against your new home’s financing. Bridge loans are short-term – as your period of dual home ownership should be – and typically come with higher interest rates. You’ll need home equity, good to excellent credit, and steady, substantial income to qualify.
- Home equity. If you do have substantial home equity, you could consider a cash-out home refinance loan or a traditional home equity loan. Both of these loans are second mortgages; while the cash-out home refinance loan typically results in a larger second loan with a cash difference to provide you with a down payment for your second home, the home equity loan simply allows you to access the equity you’ve built and usually acts as a line of credit for a down payment. These types of loans usually have strict qualification standards.
- Other funding. You may have the option to borrow against your 401(k) – check with your employer. Alternatively, if you have substantial savings or the potential for gifts or loans from family members or friends, these funds can be used for a down payment without affecting your debt.
- Sell first. Another way to avoid dual home ownership or skewing your debt-to-income ratio is to sell first. However, unless you’re able to secure a contingency deal with the buyers to allow you to purchase a new home first, you’ll need to find a new place to live in the meantime.
Find and Buy Your New Home
Once you’ve determined in what order you’ll proceed and secured pre-approval for a new home, it’s time to find the right home. Use a reputable realtor with knowledge in your target area. If you’re renting, rent near your target neighborhood to get a good idea about your commute, local amenities, schools, and more.
Determine how far outside your target area you’re willing to go, or how much of your pre-approved amount you’re willing to spend. Ideally, staying well under the top limit of your pre-approval amount is best. Aim to spend no more than 30% of your monthly income on your mortgage. Above all, have as much fun as you can while house hunting!About the author:
Information is provided by Sammamish Mortgage, a Premiere Mortgage Company in Pacific Northwest including WA, ID, OR, CO.
Summary: The home buying process can seem complicated enough on its own, even the second time around. What if you’re selling your current home at the same time? These three steps can take the headache out of finding and buying your next home.