The Basics of Selling & Buying a Home

The Basics of Selling & Buying a Home
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Selling your current home and buying a new one at the same time is all about the timing. It's a complicated process, and you don't have control of everything that must take place to have a smooth transition.

Don't think that your expected timing for your housing transactions is going to work out as you buy your next home and sell your old one. Nothing ever goes as planned. Homeowners need to have contingency plans to take care of the inevitable delays that will occur.

Here are the steps to take to make the move as stress-free as possible.

What Is the State of the Market?

Are you in a buyer's market or a seller's market? You have to know which type of real estate market you are in before you can develop a strategy. Your action plan depends on whether the buyers or sellers are in the most powerful position before you search for your dream home.

In a seller's market, you might be able to sell your current home quickly, but you may find that the homes available for sale once your start house hunting are not what you are looking for. It may take more work for you and your realtor to find several houses that meet your criteria in case your home purchase offers are not accepted.

In a buyer's market, it could take longer for you to sell your home because of the increased competition is putting pressure on home prices. You may have to set a lower selling price for your house than you had expected, and this could reduce the amount of equity and the down payment you would have available to finance the purchase of your new house.

What Is Your Financial Situation?

Can you afford to pay two mortgages at the same time? Do you have enough money to make a down payment on your new house or do you need to sell and close your old house first?

Discuss with your real estate agent how much you could reasonably expect to get for your home in the current housing market. This will give you some idea of the amount of equity you have and the amount of down payment you'll be able to make on your new house.

Meet with your mortgage lender to discuss your options of how to arrange a loan on your new home. The amount of equity you have in your house and amount of liquid cash you have available will all determine what type of mortgage product you can qualify for.

Should You Buy First or Sell First?

This decision depends on whether you're in a buyer's market or a seller's market, as well as your financial situation. How easy do you think it will be to sell your house and how hard will it be to find another one?

These are subjective questions and depend on your ability and willingness to handle the stress. Bottom Line: Buying and selling real estate is a complicated process, and the best way to make it easier is to be prepared for the unexpected.

Here are some suggestions on several ways to handle different situations.

Buying Before Selling

Here are some options to consider if you decide to buy before selling your current house:

Include a sale contingency with your offer -​ After finding a house you like, you submit an offer with a sales contingency. This means your offer to buy a new house is only valid if you can successfully sell your old house. The seller may still be allowed to accept other offers. This type of contingency works best in a buyer's market when sellers are not receiving too many offers.

Request an extended closing date -​ If you can realistically expect to sell your existing house within a short period of time, you can ask the seller to extend the closing date beyond the usual ​30 to 45 days.​ This is another contingency that will be more successful in a buyer's market.

Use your savings​ - If you have enough savings, it's much simpler to use these funds to make a down payment on your new house. This will give you more flexibility and time to sell your old house. However, remember that you’ll also need enough cash to cover closing costs and moving expenses.

Take out a HELOC​ - Set up a home equity line of credit (HELOC) with your lender to borrow against the equity in your current home and use these funds to make the down payment on your new home. You can pay off this loan when your existing home sells.

Set up a bridge loan​ - Arrange a short-term bridge loan with your bank to cover your down payment until the sale of your existing house closes. Not all home lenders offer this type of loan and qualifying can be harder because approval is usually based on your personal credit history.

Rent out your current home​ - If you're not using the money from your current home as a down payment, you could rent it out to cover the mortgage payment until it sells. This way you don't have to cover two mortgage payments.

Selling Before Buying

If you’d rather complete your home sale before buying, here are some things you can do to make this strategy smoother:

Make an offer contingent on settlement -​ In this case, you don’t start looking for a new house until you have received an offer for your old house. Then you make an offer contingent on the closing of the sale of your existing house. This strategy will work in a seller's market where you'd expect to receive additional offers fairly quickly for your existing house in case one offer falls through.

Rent another house temporarily -​ This way takes the pressure off having to buy another house quickly. It gives you temporary housing after you close the sale on your old house and time to take a stress-free search for your new house. The downside of a short-term rental is that you’ll have to pay moving expenses twice.

Arrange to rent your old house -​ If the new owners agree, set up a rent-back agreement for you to stay in your old home until you find a new one. With this arrangement, you have the money from the sale of your old house to make a down payment on your new purchase. This is another strategy that works in a seller's market when buyers have to compromise on contract terms to get the house they want.

There's no doubt that buying and selling a house at the same time can be complicated. However, if you carefully think through the potential problems and risks, you can plan for the obstacles that are likely to occur and make the process easier.