Do I have to sell my house first?
A common conversation I have with buyers who are already homeowners, is navigating the process of transitioning from their current home, to the new one. Ultimately, everyone wants to know “Do I have to sell my house first, before I can buy a new one?”
Making a Plan
There’s a lot of ways to manage the transition, and not all buyers have to sell before they buy, or sell at all. It’s imperative to have a plan in advance though. The timeline you choose (or in some cases will be forced to choose), can impact what type of offers you’ll be able to place as you shop for your new place, and can also influence what you’ll be willing to accept for offers on your current home.
There are two primary questions that will dictate whether or not the sell of your current home will necessary in order to close on your new home. First, if you expect to use proceeds from the sell of your current home to fund the down payment for the new home, then obviously you’ll have to sell first.
The second test for being required to close on the sell of an existing home prior to purchasing the new home is your debt-to-income ratio. Regardless of whether a buyer is planning on selling their current home or not, I always attempt to qualify them for their new mortgage with the assumption that their old home won’t close before the new one. This gives us flexibility because it takes away a big variable for the mortgage approval. Deals fall apart all the time. If a buyer is under contract on their old home to close before the new one, and I have that as a contingency of their loan approval, and the deal crashes, then their new purchase is pushed back also. This can affect the person selling the home my buyer is purchasing – So as you can imagine this can create a huge ripple effect.
However, if my buyer has a low enough debt-to-income ratio that I can approve them for their new mortgage, with the assumption they’ll keep their old one also, then my buyer’s new purchase deal won’t get held up just because a contract on their old home falls apart.
So there’s basically three ways to structure a mortgage loan application, in regards to a buyer’s previous residence. We’ll either put it together as (1) the old home must close before the new one, (2) we list the old home as “retained,” and it doesn’t matter if it sells first or not. (3) The third option is retaining the old home and using it as a rental.
Retaining as a Rental
While being a landlord isn’t for everyone, I highly encourage all my buyers to consider this option. I believe building a portfolio of rental properties is the number one way to build wealth and a passive income stream. While it comes with its risks and pains, owning rental properties is one of the most clearly defined paths to a complete lifestyle change.
When the property is being retained as a rental, this normally mitigates and debt-to-income issues. Old underwriting guidelines required everyone to have two years’ history managing rental properties for any rental income to be used for mortgage qualification. Current guidelines (as of 9/18/16), allow a buyer to convert his existing primary residence into a rental, without any experience as a landlord, and still count the income.
Obviously, if you’ve been living in your home, you’re not going to have a tenant in there the day you move out. We can still give you credit for the income from that property though. Just like on the sell scenario, if there’s no debt-to-income issue, I don’t mess with showing rental income because that’s one less variable to deal with. If we need this income to make the deal work though, I’ll order an appraisal for the buyer’s existing home, and have a “rent schedule” included. On these types of appraisals, the appraiser will not only provide an opinion of the home’s value, but he’ll also provide an opinion of how much rental income the property can expect to generate. The buyer will get credit for the majority of this income, not all of it. However, it’s usually plenty to offset the old home’s mortgage, insurance, and property tax expenses, allowing the buyer to retain it.
When a buyer goes under contract on their new home, they can include a contingency clause stating that they won’t be required to proceed with the purchase if their old home doesn’t sell by “x” date. While these types of contracts are a perfect solution to many issues in theory, they’re not very practical right now in a lot of markets. While I work with deals for properties all over Texas, the majority of my clients are buying properties in the DFW area. We are in a very hot seller’s market currently, with properties that are priced right receiving multiple bids within day (sometimes hours) of going on the market. Contingency contracts are much less attractive than an offer without a contingency, so the odds of getting these types of offers accepted are slim right now.
A buyer has to have a definitive plan in place because they have to be prepared for the physical transition to the new home. The timing can be tricky. If you’re in a situation where selling your current home is a requirement, then it has to close and fund before, or on the same day, as your new purchase.
Most real estate contracts in our market are 30 day contracts. If a buyer goes under contract to sell their current home, and they haven’t gone under contract on a new place yet, then they’ll definitely be under some time pressure. It’s going to take roughly 30 days to close the new deal, so basically that buyer has to find the new place and get started NOW.
There’s several different ways to mitigate this, but every situation is unique. That’s because the person my buyer is buying from is likely in the middle of a purchase transaction as well. The person that’s buying my buyer’s old home is usually in a sell transaction on their side. So it’s all about coming up with a plan that works for everyone’s timelines.
Lease-backs are one solution. With a lease-back, you sell your current home, but have your sale contract structured where you remain in the home for “x” number of days and basically pay a daily rent fee to the party who bought it.
Most situations can be resolved with lease-backs, but sometimes no good resolution can be found. In those cases temporary, transitional solutions have to be implemented. I.E. storage, and/or temporary housing.