There are many good reasons for wanting to buy a home before selling your existing home. Maybe you intend to remodel or build and prefer to live in the comfort of your own home. Or perhaps selling is difficult while living in your current home (think downsizing after 30 years or decluttering with kids). Whatever your reason, here is our answer to the question, “Should I buy or sell my home first?”
How much cash do you have on hand?
If you are wondering if you should buy a home before you sell, look first to your cash on hand. If you have cash to buy a new home, the answer is simple—yes! If not, you need to qualify for a second mortgage or figure out how to get your home in listing order before you make an offer on a new home.
Will you qualify for second mortgage?
Most lenders require that your monthly debt-income obligations total no more than 40-50% of your gross income. If you have a mortgage on your first home, that monthly payment will be included in this ratio. This can make it difficult to qualify for a loan.
Taking out a second mortgage will also require a down payment. Most loans will require a 10-20% minimum down payment. There are some creative ways to finance these down payments, although some carry more risk than others.
- Retirement Funds: Borrow up to $50,000 or 50% of your vested 401k amount. Consult a tax professional to pursue this option.
- Home Equity Line (HELOC): A home equity line of credit is a revolving line of credit, secured by the equity on your home. This may affect your debt-to-income ratio.
- Cash-out Refinance: In this situation you refinance your home and borrow more than what you currently owe. Closing fees can be high, and this scenario only makes sense when you are borrowing enough to justify the fees.
- Bridge Loan: In this situation your 20% down payment comes from two sources. The first by you in cash, 10%, and the second 10% with a second HELOC loan. Bridge loans are rare and typically require a high credit score and low debt-to-income ratio.
Have you considered buying and selling at the same time?
Today’s hot seller’s market means that you have the luxury of making an offer on a new home before putting your own home on the market. This is a common tactic in the Salt Lake market right now where it is harder to find a home than sell one.
We can advise you on strategically pricing and staging your home to accelerate an offer quickly after listing. Or add a contingency to your Buyer’s offer requiring that you sell your home before closing. Mortgage insurance is also available to tide you over in the case of a timeline disruption.
It is wise to have your home near listing condition when pursuing this option. The home-buying process should begin once your existing home is in order. We can advise you on your options, set up a timeline for buying and selling and help you determine the best way forward for your situation! Contact us for a no-pressure consultation.