How to Buy a House While Also Selling Your Current One
The house had the primary features I wanted. It was light and airy, it had three bedrooms and two and a half baths, and it was only 20 minutes from work. On the surface, it looked good so I bought it. Now that I’m living there, I realize it isn’t a place I want to live. After just a year in my new house, I’m ready to move on. This leaves me with a dilemma. Which do I do first, sell the albatross or buy my dream home? Maybe you’ve found yourself in a similar situation. Should you buy or sell first? Coming to a decision involves a lot of moving parts and research. Basically, it comes down to your finances, timing, the housing market, and your tolerance for waiting for what you want.
Consider your finances first
Gather all your bills, your credit report, and your patience, and scrutinize your situation. This will require brutal honesty on your part and some true soul-searching.
However, you’ll be in a better position to make decisions and choose a direction to follow when you know the truth about your finances.
The questions below can help you think about your situation in general terms.
Can you afford two mortgages at the same time?
To determine if you can afford two mortgages, try the following:
Add all your current monthly expenses, including utilities and insurance. Subtract the total expenses from your monthly net income, after taxes and other payroll deductions have been withdrawn. The resulting figure represents the amount of money you’ll have to apply toward another monthly mortgage payment and associated costs.
Identify sources where you can obtain the extra money for the additional monthly mortgage and utility payments.
Meet with your mortgage banker to see if you can qualify for an additional mortgage.
Can you afford utility payments for two houses at the same time?
Estimate how much you’ll need for utilities for a second home, using your utility costs for your current home. Also, consider the utility connection fees for the new home.
Do you have cash on hand for a down payment?
If you sell first, you’ll hopefully have the profits from the sale for a down payment. If you buy first, you’ll need to have cash on hand for the down payment or find another source of funding.
Is your debt-to-income ratio less that 43%?
The debt-to-income (DTI) ratio compares your monthly recurring payments to your gross monthly income. Lenders usually look for a DTI of less than 43%. To calculate your DTI, divide your recurring monthly debts by your gross monthly income. Exclude monthly payments such as utility payments and cell phone bills from your monthly debts.
Timing involves three factors. How fast will your house sell, how soon can you find the house you want, and are you and your family ready for a move? The first two points depend upon the current housing market and how much preparation you’re willing to invest in preparing your house for the market. The last depends on other factors such as your children’s school and your lifestyle preferences.
Analyze the current housing market
Is it a buyer’s or a seller’s market and what does that mean to you?
A buyer’s market means that there are more houses for sale than there are buyers looking for homes. The supply exceeds the demand so prices are lower.
A seller’s market means that there are more buyers looking for homes with fewer homes for sale. The demand exceeds the supply, which drives prices up.
Unless you want to venture into research and calculating absorption rates and Months’ Supply of Inventory” (MSI) data, rely on a local REALTOR® to tell you if you’re in a buyer or seller’s market. If you’d rather do the math yourself, calculate the absorption rate, meaning the current rate at which houses are selling in your area.
Calculate the absorption rate
To determine the rate that houses currently selling in your area, search real estate statistics to find how many homes are currently for sale and how many homes were sold last month in your market. Divide the number of homes sold by the number of homes for sale to determine the absorption rate. Typically, an absorption rate below five is a seller’s market and above seven is a buyer’s market. A rate of one is a strong seller’s market and prices will be higher. A rate of 10 is a strong buyer’s and market prices will be lower. Any rate between five and seven is considered a balanced market, a condition where both supply and demand are even.
Weigh the pros and cons
Decide which option is best for your family and plan your strategy. Deciding whether to buy a home or sell your current home first is a complex question with no definitive one-size-fits-all answer.
Do your research, weigh your options, and develop a plan of action. With a strategy in place, you’ll be ready to move forward when the timing and market are right for you.
Your mortgage banker can provide information and guide you through to making the best decision for your family and situation.