Home Buying - Things to Consider
- Think through how to handle two mortgages.
- Plan in advance to stay afloat.
Tips for Home Buyers
Buying a new home when you already own one requires careful orchestration to make sure you can cover the bridge between them. A decade ago, escrow was a long process that allowed families to make an offer on a new home and still have plenty of time to sell their old home, or to sell first and have enough time to find a new one before the sale closed. Escrow now closes in just a few weeks, which often leaves families with two mortgages for a while. These home buying tips can help you stay financially solvent during the process.
Second Home Buying Tips - Gap Financing
If you buy a new house before you sell your current house, you have several financing options to handle the overlap between homes.
Purchase Contingency Clause
You can attempt to put a contingency clause in the purchase contract stipulating that you have to sell your old home before the new one goes into escrow. During a buyer's market, some sellers will agree to home buying contingencies. Most sellers will refuse the clause during a seller's market.
If the seller agrees to the clause, they will probably include a kick-out clause that gives them the right to demand that you remove the clause and proceed with the purchase, or withdraw your offer, if they find another buyer.
Apply for a bridge loan if you don't have enough cash for the down payment and both your new and old mortgage payments. It's a short-term loan, usually with a high interest rate, that covers the gap. The loan is unsecured if you have a sales contract in place on your old home and only need funds for a few weeks. The loan will be secured by your old home if you don't have a sales contract in place. Although bridge loans have high interest rates, you won't pay much interest unless you have trouble selling your old home.
Home Equity Loan
If you haven't already put your home on the market, a better option would be to take out a home equity line of credit (HELOC) and use that money for the down payment and to cover both mortgages. Once the funds are approved, you can buy a new home and then put your old home on the market.
The Advantages of Selling Your Home First
In a seller's market, you can be fairly confident that your old home will sell quickly once you put it on the market, so buying first isn't too risky. In a buyer's market, you could wind up paying both mortgages for several months or a year if you buy before you sell.
In either case, it may be easier to sell your home first and then ask for a lease-back or long escrow so you can find a new home once you accept the purchase offer. In the worst case scenario, you rent an apartment for a month or two while you house hunt; this option is still cheaper than paying two mortgages for nine months.
Before you buy a new home, carefully research the market and make sure you can afford the bridge loan or HELOC payments if you find yourself owning two homes for an extended period.