Whenever on the market for a new house, the question of what to do with your existing one always comes up.
For many, the preferred way is to sell the existing house first before buying a new one. This doesn’t always have to be the case as some people are in a better financial situation. For these home buyers, it’s perfectly fine to buy first and sell in the meantime.
However, we’re here to discuss why you should always sell first before buying. To do that, make sure to read below.
Eliminate the “Double-Mortgage” Risk
The first reason why you should always sell first is that there is always a risk of carrying two mortgages. Since very few people can actually purchase a new house without needing a mortgage loan, the smart move is to sell first to eliminate this risk.
Mortgages are meant to last for decades. Most house mortgages take 20 to 30 years to repay. And at that time you might need to move places. So chances are you’re still carrying the first mortgage. And since you will most likely need to take another one to buy the new house, it creates a double-mortgage risk that can severely cripple your finances.
Don’t fall for the double-mortgage risk as it only creates an unnecessary financial burden.
You Will Most Certainly Be Denied For A Second Mortgage
Let’s be real about it. Very few people have the financial strength to actually carry two mortgages. For the vast majority of homeowners, a second mortgage is as close to financial ruin as possible.
To actually take out a second mortgage to buy the new house, you will need to qualify for it. And to qualify for one, well let’s just say that your debt-to-income ratio has to be spot on.
There is a chance to get approved for a second mortgage, but to do that you need to convince the lenders that you’re already close to selling your existing house. This way you can hasten the process without needing to wait for the transaction to finalize.
But if we exclude this scenario, your debt-to-income ratio has to be able to support two mortgages in order to be approved. This is certainly harder than it sounds as your debt payments must not surpass a certain percentage of your monthly income. Throughout the US, the percentage of debt-to-income ratio should total less than 36%.
You Need To Be Competitive
Let’s assume that you’re buying a house in a competitive market. This is the absolute worst time to buy as it practically means everyone is buying. When everyone is buying, prices for houses are much higher.
While this also means you will get more money for your existing home, the problem arises when we look at the market itself. If you’re buying in a competitive market, then chances are you will be competing with one or multiple other buyers.
When this is the case, you will need to table a serious offer. And if you don’t have the financial strength to carry two mortgages, then let’s just say that you will most likely miss out.
There is a possibility to convince the seller to accept a contingent offer. What this essentially means is that you will pay for the house once your existing one sells first. Not many sellers will accept such an offer, and especially not in a competitive market. Since there are more buyers than sellers in a competitive market, the seller can wait for the perfect buyer to give the best offer.
And if you don’t have the money to do so, well let’s just say that you will have to sell your existing house first.
If Buying In A Seller’s Market
The opposite of a competitive, or buyer’s market, is a seller’s market. In a seller’s market, there are more houses selling than there are buyers. This is the best time to buy a house, but the absolute worst time to sell one.
And similar problems persist in this situation, only they’re reversed. Namely, you still lack the financial strength to carry two mortgages, so buying the house relies on firstly selling your existing one.
While you might get a better price when buying the house, even your real estate agent will advise you to sell first. No matter which way you’re looking at the market, it is always advised to sell before buying.
If You’re Simply Not Ready For Such A Transaction
We keep pointing out the same thing; finances. Buying a home is the single most expensive purchase you’ll ever make. It doesn’t matter what the market dictates, what the prices say, that is still a lot of money.
That’s precisely why people go to the bank and take out mortgage loans. Like we mentioned earlier, these loans can take up to 30 years to repay. So the financial burden of carrying out two mortgage loans can be enough to suffocate you.
Ask any real estate agent out there and they’ll tell you that it’s always smart to sell first and buy later. Sure you might have to rent a hotel room or an apartment for the time being, but it beats financial ruin.
Not only that, but many people aren’t ready to commit two mortgages even for a few months. And if you’re not feeling up to it, then you should always sell your house first before buying the new one.
No matter which scenario you make or whichever you look at the situation, buying first and selling second is the go-to rule of real estate. This is why people plan for these things in advance. If you’re thinking of moving and need to look for a new place, then feel free to do it. But do understand that you will most likely need to sell your home first. So, take the necessary steps and prepare for such an endeavor.