How to Buy a House While Selling Yours

Buying a new home while selling an existing one is a challenge for many homeowners. This process involves financial and logistical considerations. Homeowners aim to minimize the period of owning two properties, avoiding dual mortgage payments or the inconvenience of temporary housing. Achieving a smooth transition requires planning and understanding available pathways. The goal is to move from one residence directly into another, streamlining the experience.

Strategic Approaches for Buying and Selling Simultaneously

Navigating the process of buying a new home while selling your current one involves strategic approaches. Each method has advantages and considerations. The choice of strategy depends on market conditions and personal risk tolerance.

Sell First, Then Buy

One method is to “Sell First, Then Buy.” This approach involves selling your current home, securing the proceeds, and then using those funds to purchase a new property. This strategy provides clarity on your financial capacity for a new home, eliminating the stress of carrying two mortgage payments. Selling first also removes pressure to accept a lower offer due to time constraints, allowing for strategic negotiation. A downside is the need for temporary housing, such as a short-term rental or staying with family, between closing on your old home and moving into your new one.

Buy First, Then Sell

Conversely, the “Buy First, Then Sell” approach involves purchasing a new home before your current property sells. This strategy offers the convenience of moving into your new residence without temporary housing. However, it introduces the financial risk of carrying two mortgages, along with expenses like property taxes and insurance, for an undetermined period. This places financial strain on homeowners, potentially necessitating a quick sale of the old home at a less favorable price.

Contingent Offer

A “Contingent Offer” mitigates risks when buying before selling. This involves making an offer on a new home that includes a home sale contingency clause. Your offer to purchase the new property depends on the successful sale and closing of your current home by a specified date. This protects the buyer from owning two homes if their current one doesn’t sell.

However, sellers in competitive markets may be hesitant to accept such offers, preferring those without contingencies. The contingency period ranges from 30 to 60 days, giving the buyer time for their home to sell.

Leaseback

A “Leaseback” agreement, also called a rent-back agreement, allows the seller to rent their sold home from the new buyer for an agreed-upon period after the closing date. This provides the seller additional time to finalize moving plans or await the completion of their new home, bridging any transition gap. A leaseback can be mutually beneficial, offering the seller flexibility and providing the buyer rental income. Leaseback periods last a few weeks to a few months, with terms, including rent and utility responsibility, outlined in a written agreement.

Financial Management During Concurrent Transactions

Managing the financial aspects of buying and selling homes concurrently requires considering tools and potential burdens. Home equity is a financial element in this process. It represents the portion of your home’s value you own outright, calculated as the difference between the property’s current market value and the outstanding mortgage balance. This equity can be leveraged to finance the down payment or full purchase of a new property.

Bridge Loans

Accessing home equity occurs once your current home sells and proceeds are received at closing. If you buy a new home before selling your current one, bridge loans are a financial tool. A bridge loan, also known as a swing loan or gap financing, is a short-term loan providing immediate cash flow during the transitional period.

It bridges the gap between the purchase of a new home and the sale of the old one. Borrowers use their current home’s equity as collateral for a bridge loan, which can fund the down payment on the new property or pay off the existing mortgage temporarily. These loans have higher interest rates than traditional mortgages and repayment terms ranging from a few weeks to 12 months.

Carrying Two Mortgages

A financial implication of buying before selling is carrying two mortgages simultaneously. This means being responsible for monthly payments on both your existing home’s mortgage and the new home’s mortgage. Lenders assess a borrower’s debt-to-income (DTI) ratio to determine their ability to manage this dual financial obligation. Lenders prefer a DTI ratio below 43%, meaning total monthly debt payments should not exceed 43% of gross monthly income. Carrying two mortgages also entails paying two sets of property taxes, homeowners insurance, and utility bills, which can strain financial resources until the first home sells.

Earnest Money

Earnest money deposits are another financial component. This deposit, a percentage of the purchase price (1-3%), is submitted by the buyer to demonstrate serious intent. In contingent offers, if the contingency (such as the sale of the buyer’s current home) is not met, the buyer has the right to reclaim their earnest money, provided contract terms are followed. Terms regarding earnest money and contingencies are outlined in the purchase agreement and can vary.

Coordinating Closings and Moving Between Homes

Navigating the simultaneous sale of one home and purchase of another culminates in coordinating closing dates and the physical relocation process. Aligning closing dates for both properties minimizes financial overlap or the need for temporary housing. While a truly simultaneous closing is rare, a “back-to-back” or “concurrent” closing is achievable. This involves scheduling the sale of your current home to close first, with the purchase of your new home closing shortly thereafter, on the same or the following day.

Escrow

The escrow process coordinates these transactions. Escrow serves as a neutral third party holding all funds and documents related to the sale and purchase until all contract conditions are met. In a concurrent closing, proceeds from the sale of your first property are directed into the escrow account, which then funds your new home purchase. Utilizing the same title and escrow company for both transactions streamlines this process, reducing delays associated with transferring funds and paperwork.

Temporary Housing

Despite planning, a gap between selling and buying can occur, necessitating temporary housing solutions. Options include short-term rentals with month-to-month leases, or extended-stay hotels providing furnished accommodations. Staying with family or friends can be a cost-effective alternative, though it may offer less privacy.

Moving Logistics

Moving logistics require attention, especially within a tight timeline. This includes packing belongings, arranging for professional movers, and managing utility transfers. Professional moving companies offer services from full-service packing and transportation to hybrid options. Booking movers 6-8 weeks in advance is advisable to secure preferred dates and services. Scheduling utility transfers, such as electricity, water, and internet, from your old address to your new one a week or two before the move ensures continuous service.