As the busier spring and summer home buying seasons approach, many homeowners are looking to put their homes on the market, while also looking for a new home. This has been a challenge due to the lower inventory levels and the competitive market, which make it difficult to find a replacement home. Selling a home contingent upon finding a replacement home makes it unattractive to most buyers, yet most sellers need the equity in their current homes to use as a down payment for another home. The main challenges: coming up with a down payment, and stricter money lending rules that require staying within an acceptable debt-to-income ratio while having two mortgages.
Many people get their homes sold, put most of their belongings into storage, then move into temporary rentals or with family or friends until they can move into a new home. While this is often the least costly way, here are some alternatives to having to move twice:
Lease back your current home from the buyer for a few months. If you're selling during the winter, a new buyer may be amenable to this type of arrangement, as many people don't like to move in winter. Offering to pay market or above-market rent may induce a buyer to cooperate with you as well as motivate you to quickly find a new home.
A home equity line of credit is another option if there's enough equity in the home to use as a down payment on a new home. These usually have a good rate and can enable you to buy another home. Check with your lender as you may have to qualify for both mortgages, in terms of debt-to-income ratios, if you sell your current home before getting the new one. Buyers lucky enough to be able to swing this can have an easy way out.
Getting a loan from your 401k account is another option for obtaining a down payment. Many lenders view 401k loans as borrowing from yourself, so your debt-to-income ratio may not be affected, so checking with your lender is worthwhile. Once you close on the sale of your new home, you can then repay the loan. This strategy will require 401k administrator and lender advice to see if it's feasible.
Private money loans are another alternative and usually carry much higher interest rates, but given that our current low interest rates and market appreciation rates are averaging about 1 percent per month, the equity increase in your existing home could exceed the additional interest.
The main challenge of getting a new home before selling your own home is in meeting lender requirements to be able to carry two mortgages for a short time, and in obtaining a down payment for your new home. There are also other options not included here, due to space constraints. Unfortunately, most options, other than moving to temporary housing when your home sells, require that you qualify with enough income to carry two mortgages and down payment funds for the new mortgage. Reviewing your options with your lender before putting your home on the market is therefore important before taking any action. Any financing should be taken care of before listing your home so you're certain where you stand.