Is your starter home bursting at the seams? Are you eager to downsize and enjoy the freedom of being an empty nester? Did you recently stumble upon your dream home? Did you land a new job in a new community? If you’re an existing homeowner who answers “yes” to any of these questions, a new home purchase may be in your future.
But what do you do with your current home? Do you sell it before making an offer on a new place or wait until you’re settled into your next home?
This is a dilemma many existing homeowners face when they’re ready to buy a new home. There are pros and cons to both options and you need to carefully consider a variety of factors before deciding which option is best for you. These include:
- Your financial situation and financing options
- Current housing market conditions
- Your appetite for risk
Buying before selling
If you choose to buy before selling, here are a few options to keep in mind to help balance the sale of your current home and the closing of your new home:
- Include a contingency clause in your agreement with the seller. This will require that in order for your offer to close, your current home must sell. This is also called a “subject to sale” agreement. Keep in mind that, with this agreement, you run the risk of another buyer swooping in ready to buy the home with no contingency and the seller accepting their offer instead. The risk of this happening is even higher in a seller’s market.
- Own both homes at the same time. If you have the funds to finance the down payment of the new home while also meeting payments on your current home until it sells, owning both for a short time may be the least complicated and the most convenient route.
- Get a bridge loan. Bridge loans are secured by the equity you have in your current home and can help pay off your mortgage, pay for closing costs and put a down payment on your new home. Once your home is sold, the loan is paid off from the net proceeds from the sale. Work with your lender to learn if you qualify for a bridge loan.
Choosing to buy a home before selling a current one is a more popular choice among homeowners in a seller’s market, because finding a home you like for a price you’re willing to pay will likely be more difficult than securing a buyer for your home. This is because there are fewer homes available than there are buyers seeking homes, causing buyers to experience longer home searches and get involved in a bidding war or two.
If you recently stumbled upon your dream home and can obtain the financing to buy it before receiving funds from the sale of your current home, you may decide it’s worth the risk to own both properties for a short time. Remember, the risk of having to finance both properties for a prolonged time is higher in a buyer’s market when it might take longer to sell your home.
Selling before buying
Many homeowners sell their homes before buying a new one. There are several advantages to this approach:
- Selling first often provides buyers with the cash they need for a down payment on their new home
- There’s no risk of having to make two house payments for a period of time
- Financing the new home is often less complicated when the home buyer doesn’t have an existing mortgage
While selling before buying tends to be more straightforward and less risky, it can also be less convenient, as you may need to find a short-term rental to live in between the time you close on your current home and move in to your new one.
Selling before buying is also more common in a buyer’s market, in which selling a home is the more difficult part of the process, and therefore, better to complete first. This is because, in a buyer’s market, the number of homes for sale exceeds the number of people looking to buy.
As the name implies, a buyer’s market is a great time to buy a home, as costs will likely be lower and you’ll have more homes to choose from. However, if you’re selling a home, it may take longer to secure a buyer and you may even need to lower your asking price to compete in the market.
Work with a knowledgeable lender
No matter which route you choose, it’s important that you work with a lender who is knowledgeable about the process and can demonstrate which options are best for you and your situation. Understanding the housing market and what your options are upfront will lead to a smoother process for everyone involved. It will make the process of selling your home and buying a new one much less stressful and more fun, as it should be!