Selling and Buying a House at the Same Time: How It Works
When the real estate market is tight, many people find themselves in the tough position of selling and buying a house at the same time. This balancing act isn’t for the fainthearted — it involves making critical decisions under pressure and possibly taking on two mortgages at once.
Read on as we untangle the complexities of this common real estate challenge. We’ll cover whether it’s better to buy or sell first, the pros and cons of each strategy and how to manage both transactions simultaneously.
What to know before buying and selling a house at the same time
In a dream world, all the steps to buy and sell a house at the same time would line up perfectly, but with transactions this complex you can’t always control exactly when you’ll make it to closing. That’s why it’s crucial to understand whether the current real estate market favors buyers or sellers and how the timing of your transactions can impact your plans.
Buyer’s market
In a buyer’s market, homes are readily available in your area, but selling can be tough. You may end up buying your new home before you can sell your old one.
What to know: You’ll need to cover your new home purchase without the funds from your existing home’s sale.
Strategies to consider in a buyer’s market:
- Get a sale contingency: Contingencies are clauses included in a real estate contract that give buyers and sellers a way to back out of the deal — if either party can’t satisfy a condition laid out in the contract, they have the right to negotiate the contract terms or cancel it. A sale contingency typically means you can walk away from the new home purchase if you’re unable to sell your old home, typically within 30 to 60 days. This can protect you from being stretched too thin.
- Choose an extended closing: An extended closing is when a real estate transaction is scheduled farther into the future than the typical closing period. Generally, it can take anywhere between 40 and 50 days to close after the seller accepts the buyer’s offer. However, in an extended closing, the parties agree to push this date, sometimes by several months.
Seller’s market
In a seller’s market, homes in your area sell quickly, but buying a home is tough. You may end up selling your existing home before completing your next purchase.
What to know: You’ll need a plan for where you, your family and your belongings will stay before you close on a new home.
Strategies to consider in a seller’s market:
- Get a settlement contingency: A settlement contingency ensures that selling your old home won’t leave you stranded with nowhere to go; if you aren’t able to find a new home, you can cancel the sale.
- Make a rent back agreement: A rent back agreement gives you permission to stay in the home you just sold as a renter while you wait for your new home to be ready. It’s just another way to protect yourself from scrambling to find a place to lay your head — and all of your belongings — while you’re selling and buying a house simultaneously.
Buying or selling a house first? Pros and cons of each option
Buying a house before selling
| Pros | Cons |
|---|---|
You won’t be stuck couch surfing while you search for a new home You’ll have time to empty and clean your old place, making it more presentable to potential buyers You won’t have to worry about renting a storage unit to store all of your belongings | You have to carry two mortgages unless you can cover the new home purchase with cash or already own your current home outright Your debt-to-income (DTI) ratio may be higher, which may make it harder to qualify for your new home loan |
Selling a house before buying a new one
| Pros | Cons |
|---|---|
You won't have to make two mortgage payments simultaneously You can put the cash from your sale proceeds toward the down payment on a new home | You may have to live with relatives or pay for a hotel or an Airbnb You may need to rent a storage unit for most of your belongings |
5 steps: How to buy and sell a house at the same time
1. Assess the market
The first thing you’ll want to do is find out how long houses are staying on the market (in both locations, if you’re moving a significant distance). This will help you estimate how fast your house could sell, how fast you may have to move and whether you’re dealing with buyer’s or seller’s markets.
2. Do some math and investigate financing options
Put some prices into a home loan calculator and take a closer look at your current finances. Here are two questions to ask yourself: Do I have enough income to cover two mortgages for a while? Do I have enough savings to make a 20% down payment? The answers can help you figure out your best financial move.
3. Apply for financing
Financial experts recommend that you have a mortgage preapproval and shop around for the best interest rate. You can apply with multiple lenders and it won’t hurt your credit any more than applying with one, as long as you submit all applications within 14 days. That’s because the three major U.S. credit bureaus — Equifax, Experian and TransUnion — allow a two-week window for consumers to rate-shop.
4. Meet with a real estate agent
Juggling two complex real estate transactions can be tough — it’s wise to seek out professional advice and talk with a real estate agent. Be sure you feel comfortable with your agent; if it appeals to you, one agent may be able to help you sell your old house and purchase your new one.
5. List your home and tour prospective homes
Put your house on the market and tour places that catch your eye. Here’s how to negotiate on a home price.
Financing options for selling and buying a house at the same time
Traditional mortgage
If your savings account is looking a bit low, many mortgage lenders offer low- or no-down-payment mortgages. However, note that if you put down less than 20% with a conventional loan, you’ll need to pay for private mortgage insurance (PMI) until you build 20% home equity.
Second mortgage
A second mortgage is a special type of home loan that converts some of your home equity to cash. Common second mortgage options are home equity loans and home equity lines of credit (HELOCs).
With this strategy you would tap your home equity for a down payment on your next home. Then, when your house sells, you can pay off the second mortgage debt.
Need the cash quickly? Consider HELOC lenders that specialize in fast closings.
Cash
Secure cash to make an all-cash offer on your new home. Here are several ways you could get the liquid funds needed for your offer:
- Borrow against your 401(k)
If you’re fully vested in your 401(k), you should be able to borrow against it without penalties. There are no loan costs and the monthly payment is usually deducted pretax from your paycheck. But keep in mind that the portion you borrow against won’t be actively traded in the market, and there may be restrictions on how much you can access.
- Get a gift
On your birthday or holiday wish list, ask for cash. The gift-giver will likely have to sign a gift letter saying that the money is, in fact, a gift and not a loan.
Get a bridge loan
A bridge loan is a short-term, interest-only loan that lets you leverage a part of your existing home’s equity. You can use that equity for the down payment on a new property, even if your current home is on the market. This can be quite handy, especially since cash-out refinances — another common way to tap your home equity — don’t allow you to borrow against the equity of a home that is currently for sale.
Despite the fact that bridge loans can be an expensive option — they typically come with higher rates than home equity loans — they can make sense in some circumstances. Since the terms are interest-only, the total combined payment between your new first mortgage and the bridge loan may be lower than a home equity loan payment.
Alternatives to buying and selling a house at the same time
Find a temporary rental
Much like the strategy of using a rent back agreement, the idea here is to sell your home first. Then, find a rental option to live in while you’re nailing down your home purchase. This does mean one extra move (compared to a rent back agreement), but it gives you more flexibility to choose what will work best for you as a temporary home base.
Refinance as an investment
You could refinance your house as investment property, keep it as an asset and lease it rather than sell it. Just keep in mind that a conventional loan used to finance an investment property may come with a higher interest rate or an extra fee at closing.