To buy or to sell first?
- Consult with a Realtor or mortgage broker early and make a plan.
- Buying first makes moving easier but can be costly if your old house doesn't sell.
- Bridge loans can help you secure financing before you sell your current home.
- Selling first makes financing easier but may require renting and moving twice.
Unless you’re a first-time homebuyer, you will have to sell your current house to buy a new one. Whether you should try to sell first and then buy or buy first and then sell depends on your house, your finances and the housing markets where you plan to sell and purchase.
It is important to make a plan before jumping into the market. Meet with your Realtor and your mortgage broker or banker early to start gathering the information you need. Get your house appraised so you know how much equity you have. Get pre-approved on a loan and find out how much home you can afford. Get the pulse of the market to determine how quickly you can sell and how much competition you will have when buying.
Whether you buy first or sell first, you often can negotiate with the other parties involved to coordinate the closings. This can help ensure you have funds available from the sale of your current home to purchase your new home and that you can take possession of your new home before you have to move out of your current home.
Here are some other points to consider when deciding if you want to buy first or sell first.
If you can afford to make a down payment and pay closing costs on a new home without selling your current home, consider buying first. This option makes it much easier to make moving arrangements because you won’t have to coordinate with the sellers of your new home and the buyers of your old home. You also can have time to get your house ready to sell and make any last-minute improvements that can add value to your home.
One downside to this option is that if your current house doesn’t sell quickly after buying your new home, you can end up paying two mortgages for a time. It also may be difficult to get your new loan approved if your old mortgage is included in your debt-to-income ratio.
A bridge loan can help you buy before you sell. This is short-term financing that you generally must pay off within three, six or even 12 months. Bridge loans often have higher interest rates but can fund quickly and require minimal documentation, which can be important in a seller's market. After you sell your current house, you can pay off the bridge loan with the funds from the sale or use those funds to refinance the bridge loan into a conventional mortgage.
Other options for paying for two homes at once include getting loans from friends or family to help pay the down payment on the new home or renting out your current home after you move to help pay that second mortgage until you sell. You also can make your purchase offer contingent on the sale of your existing home, but contingent offers often get rejected in a seller’s market.
Selling before you buy makes financing your new home easier because you can use the funds from the sale to make a down payment and pay closing costs, and you don't have that second mortgage weighing down your finances. This also means you have less pressure to sell your house quickly, which can make you accept a lower offer than you might otherwise.
Selling first makes moving trickier, however, because you must coordinate moving out of your house so your buyer can move in, with moving into your new house after the seller moves out. If you cannot close quickly enough, you may even end up renting for a time before moving into your new home, which means moving twice and possibly putting the bulk of your belongings into storage.
If you sell first, you may be able to add a "rent back" clause to the sale, allowing you to rent your current home for a short time from the new owners while you close on your new home and avoid moving twice.