Selling your home while buying a new one can be a stressful process, especially when it comes to financing. If you’re looking to buy a home soon while getting rid of your current home, here’s what real estate experts recommend to make the transition as smooth as possible.
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Sell before you buy to use your home equity as a down payment on your next home
Don’t have enough money in the bank for your next deposit? If you already own, you can do what 38% of buyers do: sell your home first and use the proceeds to buy your new home.
One way to do that is to complete the sale and purchase on the same day, said Nicole Rueth, senior vice president and branch office manager for the Rueth team at Fairway Independent Mortgage Corporation.
“As long as you close in the same title company, this strategy is very simple,” she said. “If you’re working with two different title companies, all they have to do is move the funds from one title company to the other.”
A downside to this strategy is that it can be difficult to negotiate the same closing date with your buyer and seller.
See: 32 insider tips for buying and selling a home
If you sell before you buy, save enough to cover temporary storage and housing costs
What if you can’t buy and sell on the same day? You can always sell first, but be prepared for additional costs, said Beatrice de Jong, broker and consumer trends expert at Opendoor.
“If you sell your house, it will probably sell very quickly. But in most cases, finding your next home will take much longer than in previous years,” she said. “Make sure you have a place to go and a place to store all your stuff.”
With so few homes on the market, Mortgage Network senior vice president Brian Koss advises homebuyers to save enough to live in temporary housing for a year.
“It gives you some time to think about what’s going on in the market,” he said. “It’s not a bad idea to get some cash and make sure your house is sold, but it does make the transition a three-step process.”
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If you’re buying before you sell, weigh your financing options
Maybe temporary housing isn’t for you. In this case, consider buying a new house before selling. Keep in mind that this strategy can be more complicated as you will need funds for a down payment before you can enjoy your current home.
There are several ways to approach this step. The first option is a bridge loan, which is a short-term loan against your current home.
“For this to work, you need to be able to afford three loans — the original loan, the bridge loan, and the new loan,” Rueth said. “Bridge loans are a bit expensive and usually have higher interest rates, but that’s irrelevant because you’ll only be holding them for a short time.”
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Another option is to pull from your 401(k) or IRA. Keep in mind, however, that you will either have to pay yourself back with interest or pay an early withdrawal fee.
For this reason, Koss recommends opening a home equity line of credit (HELOC) on your current home instead.
“When you’re first thinking about buying a new home, it’s a good idea to get as much equity in your home as possible,” he said. “It’s the cheapest way to do it because then you only pay interest when you borrow. It therefore acts as a bridging loan but cheaper.
The final option is to make a cash offer. A 2019 Redfin study showed that cash bids doubled buyers’ chances of winning a bidding war.
If you don’t have enough cash, check with a company that offers a cash backed program, such as Program of offers supported by Opendoor.
“It allows buyers to write a cash offer, which is really useful right now in this ultra-competitive market,” de Jong said. “Our data shows that 75% of sellers say a funded offer had to be 10% better than a cash offer to win.”
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How much you need to save to buy before you sell
Although buying before selling allows for a faster transition, it also comes with additional costs. Plan to pay two mortgages until your first home is sold.
You also need to save enough money for the down payment, de Jong said.
“Once your offer on a house has been accepted, you will have to deposit the deposit, which will be retained until closing. This is typically 1% to 3% of the purchase price, although it varies from state to state and market to market,” she said. “It looks like a small percentage, but it’s still a significant amount.”
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