According to a 2017 report by Zillow, more than 70 percent of home sellers look at homes for sale while their current home is on the market. What’s even more interesting is that a full 25 percent of them said they wished they would have started the selling process earlier.
Most of these home sellers ran up against a common problem: Should I buy first or sell first?
Let’s take a look at just some of what you should consider and a couple of solutions.
Current market conditions
In a seller’s market (when there are lots of buyers looking for homes but few homes available) you’ll most likely not have to worry about the home selling. But, once it does, you’ll be joining the ranks of all the other buyers, competing against one another for the few homes on the market.
For this reason, many home sellers choose to rent for a time after selling, until the market changes in their favor.
Others can’t stand the thought of having to pack up and move yet again. Determine your tolerance for this scenario.
If you don’t have a large cash reserve, you’ll need the equity in your current home to purchase your new one. This means you’ll have to either sell your current home before buying or choose from among the other options we outline below.
The two-house payments conundrum
Another major concern we hear from our listing clients is that they’re afraid that if one side of the deal concludes before the other, they’ll be faced with having to make two house payments.
If your budget can tolerate this eventuality, then you’ve nothing to worry about. If not, read on.
Solutions to consider
Luckily, you have several remedies to choose from when faced with the “should I sell first or buy first” question.
Loans that “recast”
In the past, there were bridge loans, which were a short-term loan that provided instant cash flow. They were typically only provided to borrowers with high credit scores and low debt-to-income ratios. Since “the Great Recession,” however we haven’t seen these in many years. Another tool today that I’ve seen useful are conventional loans that will “recast” themselves.
Todd Blake with New American Funding out of Lawrenceville, GA told me, “We have been selling our recast feature on our 30 year or 15 year deals. Basically if the client can put at least 5% down then when they sell their home, they can take the proceeds and recast the loan based on the principal reduction.”
Highlights of this program include the following;
o FNMA and FHLMC loans (Conventional) only (no FHA or VA)
o Borrowers making a lump sum principal reduction of at least $5,000 (or have previously made additional principal payments that total at least $5,000)
o NAF will re-amortize the loan based on the remaining term and payments will be reduced
o Multiple recasts can be completed during the life of the loan
o Borrower(s) are provided a Recast Modification Agreement which must be executed and notarized.
o Executed document and processing fee of $300 must be returned to NAF Servicing.
So basically what this means is that if you needed or wanted to push down the mortgage payment on your purchase, but hadn’t closed on your existing loan yet, as long as you qualify and meet loan guidelines, Todd and New American Funding could close your home loan on the purchase with 5% down and once your sale closes on your existing residence, you can have your new home loan “recast” and it will have the immediate result of pushing your payment down to where you wanted it to be to begin with!
Kind of a neat concept.
The Home Equity Line of Credit, or HELOC for short, offers a way for you to get at all that equity you’ve built up in your current home. This is money you can use to buy the new home and then you will pay off the HELOC with the proceeds from the sale of the current home.
There are several disadvantages to using a HELOC to come up with the money for your next home. Speak with your lender and financial advisor about this option.
Borrow against your 401(k)
Ask financial experts if borrowing money from your 401(k) to come up with the cash for your new home is a good idea and you’ll get one of two answers: “Sure” or “No way!”
The latter camp includes pros who remind you about the fact that you’ll be losing the compounding benefits of your invested money. The former group will tell you to go for it because real estate is an amazing investment and, besides, you can pay yourself back with interest!
Again, please speak with your financial planner and/or CPA before deciding on this option.
Negotiate with the buyer
It’s always worth it to attempt negotiating certain contract terms with the buyer of your current home.
Ask the buyer for a longer escrow, such as 60-75 days, to give you time to house hunt for the next home. You might also ask the buyer to consider renting your home back to you after the sale closes. Offer to pay a rent amount to cover their mortgage payments, if necessary.
There are disadvantages to the rent-back scenario, so run this idea by your agent.
Although it is often challenging, a simultaneous close is a common way of dealing with buying/selling. This type of transaction times the close of both transactions (the sale of your current home and the purchase of the next home) to occur simultaneously.
Yes, there are dangers in this option, especially in the hands of an inexperienced real estate agent.
Whether to buy or sell first is a common dilemma and both have their pluses and minuses. We’re happy to discuss this with you in more detail; feel free to contact us.