Have a mortgage and want to buy another house?
The Age-Old Dilemma
The residential real estate process has an inherent flaw, at least for those without unlimited funds. In order for most to purchase your next house, you must sell your current home and pay off your existing mortgage first. So many homeowners wonder, “If I have a mortgage and want to buy another house, will I have to sell before I begin the search?
For most, the answer is yes. Most banks won’t approve another mortgage unless the first one has been paid in full. Unless you have an income that can support dual mortgages, plus an excellent credit score and a low debt-to-income ratio, you’re in the same boat as the rest of us.
This poses the question of whether you should begin your new home search before or after you sell your existing home and pay off that mortgage.
Shop for Your Next Home First
If you have a mortgage and want to buy another house right away, you can begin your search before selling. There’s a problem with that, however. You may actually get your wish and find your dream house. Then what? Remember, you’re tied to your existing mortgage. You may be one of the few who can get approved for a second mortgage, but you’re assuming you won’t have to pay two mortgages for long, right? What happens when your house doesn’t sell as quickly as you assumed? How long can you afford to pay both mortgages and their related bills before your savings take a major hit? As you can see, this is risky.
The other scenario is to immediately put your house on the market and hope it will sell before another buyer purchases your dream house. This is also risky. The average home sold in 68 days in 2018. That’s from listing to close. The seller can’t just rely on your offer though. They’re going to want you to close in a reasonable time. They know plenty of offers fall through, which is why they have a deadline. If you’re unable to sell your home in time or are held up due to other financing issues, the seller will go with the next available buyer and you’ll lose out on your dream home.
To sell your existing home quickly, you may decide to list it below market price. You may not make as much as you were hoping, but at least you can likely sell quickly, preferably before someone gets your dream house. It’s important to consider how much you will need to ask in order to be able to pay off that mortgage and have enough left over for a down payment on the new home. Ask too little and your dream home might be out of reach. Ask too much and you risk having your home sit on the market while the home you really want goes to the next highest bidder.
Since you have to wait for your home to sell, you’ll need to place a home sale or mortgage contingency on your offer. The seller has to decide if they want to accept this contingency. Accepting your offer requires them to pull their house off of the market and waiting to see if you sell your home and pay off your mortgage within a specific period of time so the deal can close. Once again, however, this is risky. Not many home sellers are willing to wait, especially if the market is hot, their neighborhood is in high demand, and/or their home is new to the market. It is often worth it to them to decline a contingent offer in hopes of a “clean” offer with no contingencies. Wouldn’t you?
Another option is to make an all-cash offer using the funds of a company like Homeward. With this innovative alternative, you can search for a new house even before you list and sell your existing home. When you find the home you want, you apply to use their money to make the purchase. They actually buy the home on your behalf using their cash. That’s the good news. The even better news is all-cash offers are the cleanest offers. That’s why they are twice as likely to beat out financed offers and can result in a 2-5 percent discount from the seller. With no bank appraisals needed, you save time and money.
This option gives you ultimate flexibility in when you move into your new home. You can move in as soon as you want. You have the control to move immediately (avoiding staging and cleaning the home for showings), after you complete renovations on the new home (a huge plus if you don’t want to live in the home during remodeling), or when your existing home sells. All that you have to do is lease your new home back from Homeward until you close on your existing home sale. This process completely removes the hassles and risks associated with having a mortgage and wanting to buy another house.
Sell First
Most experts will tell you that you should sell your existing home first to avoid paying for two mortgages or having to move twice. If you decide to sell your existing home before you buy your next house, things can get just as sticky as if you decided to search first before selling. Selling first means you must wait to look for a house until you at least have a solid contract on your existing home. For many, this can be a lesson in patience. It’s hard not to look around and see what’s out there.
When you do get a contract on your existing home, the stress really begins. Now, it’s a mad dash to find the right home, put in an offer, negotiate, then wait for the inspections and appraisals if your offer is accepted. If it’s not, you’re back to square one. The clock is ticking on the close of your existing home. If you don’t close on a new home before you close on your existing home, you’re going to have to move twice.
This scenario is all too common. People sell their current home before they are in their new home, requiring them to pack up, rent a home and often a storage unit, and unpack their things into a temporary place. They can pay rent and storage fees for months while they search for the new home and wait for their purchase to close. Once it does, they get to pack up again, pay movers (again), and finally get settled. The process is not only expensive, but it’s unbelievably stressful and can often result in homeowners choosing a home out of desperation more than for true love for the house.
In the best-case scenario, homeowners who sell first are blessed with the perfect-timing angels. There is no lag time between selling and buying and they can move from one house to the next one time with no stress. Good luck with that.
If you have a mortgage and want to buy a house, think hard about each option and consider the pros and cons. In the end, the objective is to get into the house you want as quickly and affordably as possible. Play your cards right and you can turn what is considered one of the most stressful times in life into the fun, exciting achievement it should be.
