Many homeowners wait to search for a new house until their current house sells. But these days, houses can spend months on the market. While putting a contingency offer on a new home is an option, there’s no guarantee your offer will be accepted in the current market.
Find out now: How much mortgage can I afford?
If you are considering buying a home before selling your current one, ask yourself the following three questions.
1. Can You Afford to Carry Two Mortgages?
Before buying a second home, make sure you can absolutely afford two mortgage payments for an extended period of time. First, talk with your mortgage lender to see if you will qualify for a second mortgage. Even if you qualify, don’t assume you can afford the payments, since banks will often overqualify buyers — use SmartAsset’s affordability page to determine if you can take on the added debt. Take a careful look at your monthly income and expenses to determine where you will get the extra money each month. Be sure to consider the costs of utilities and insurance for both homes.
If you were planning on using the profits from the sale of your home for a down payment on the new one, you need to determine where you’ll get the down payment in the meantime. Many home buyers take out a bridge loan — a short-term loan that uses your current home as equity — to pay for the down payment until their house sells.
Not all bridge loans are created equal. Yahoo! Finance points out, “Terms of a bridge loan can vary. Some are structured so that they completely pay off the old home’s first mortgage, while others pile the new debt on top of the old.” In a typical bridge loan, the article continues, you’ll use the loan money to pay off your existing mortgage (plus closing costs on the new home and six months prepaid interest), and the rest is used to finance your down payment.
Another alternative is to consider a home equity line of credit on your current home, but you must be certain that housing prices will not drop in your area or that you will not sell the house for less than your mortgage.
2. Do You Have a Backup Plan?
Many sellers assume that they will have the second mortgage for a short period of time, but in the current real estate market, nothing is certain. Think about what you will do if your house stays on the market for over a year or if you are unable to sell your current house for the amount you need.
You may be able to rent your home instead of selling it, but there are factors to consider. Is your home in an area with a strong rental demand? Would the rental income cover your mortgage? Research current housing prices and talk to a broker to determine demand in your area. You should also consider the cost of hiring a management company or time involved in being a landlord.
3. What Is the Cost of Not Buying the House?
Once you have determined you can afford the house and have a backup plan, the next step is to decide if this is the best move for your family and your finances. One of the biggest reasons people buy a home before their current house sells is fear that they’ll lose an opportunity by not making the move now.
An opportunity presents itself when the new home is priced well below market value. Then it makes sense to buy before you sell because the money you will make offsets the time you will spend making double payments.
You should also consider purchasing the home if it is your dream house. This is especially true if you would not be able to afford the house at market price, or if you think the home will not be available when your house sells. People also pull the trigger on buying early if the new house has a characteristic they may not be able to find elsewhere — if it’s a historic home, for example, or is located on a pristine lake.
Only you can decide whether buying a new home before you’ve sold your current one makes sense. In the end, it’s the combination of your finances, your backup options and the appeal of the new opportunity that will help you make the right choice for you.