As if buying or selling a house is not stress-inducing enough, trying to do both at the same time can be beyond overwhelming. However, with a little thoughtful planning properties can be shuffled smoothly, and you don’t have to take on excessive financial risk to make it happen.
1. Sell Your Current Home Before Buying a New One
The most common option is to sell your current home first before buying another. From a financial standpoint, this option just makes sense because there is the least amount of risk. After you sell, you get pre-approved. The lender will look at your monthly obligations and available down payment to determine how much you are approved for. There are a lot of online calculators you can use that will give you a general idea of what your monthly payment will be based on the purchase price of a home and your down payment.
2. Buy Before You Sell
Buying before you sell is not a feasible option for everyone, but if you have a down payment and your lender determines that your debt-to-ratio won’t exceed their limit with two house payments then you may have no problem getting approved for a second mortgage. You may be thinking the lender should only be looking at the new mortgage payment to determine your debt ratio since you have no intention of keeping both homes. However, they need to look at it from a risk standpoint. There are no guarantees that you sell your home in the next couple months. Will you be able to afford both payments until your current house sells?
3. Turn Current Home into a Rental and Buy a New One
Depending on your profile and your lender, you may be able to qualify for a second mortgage, so you can turn your current house into a rental and buy a new one. You may even be able to use rental revenue as a source of income to qualify. If you are counting on rent, lenders typically let you use 75 percent of this income for qualification purposes.
It is important to note that if you are buying a second home to use as a rental then down payment requirements and interest rate may be higher than a standard mortgage.
It can be very overwhelming when you need to buy and sell at the same time, but keep in mind that people just like you do this every day. Lenders and realtors are used to these transactions. Know your options and determine the best scenario for you.