Kris and I had been in our first house for ten years when our dream home fell in our lap one day. Until then, we had no plans to move. We were completely unprepared to sell our existing home while buying a new one. Eventually we made it happen, but we violated a number home-buying best practices as we scrambled to make our dream a reality.
We were particularly worried about how to time things financially. We couldn't afford to carry two mortgages — how would we possibly make ends meet? Ultimately, we were saved by the rise of the housing bubble and a friendly banker. Our home sold in one day, and we were able to close on it soon after closing on the new house. Meanwhile, a home equity loan floated us the cash we needed to get by.
I don't recommend following our example. I think it's better to be prepared, to make your move in a sensible fashion. Smart Money has an article on how you should actually sell your new home while buying a new one. Though this piece was originally published in 2005, it has been recently updated to reflect current market realities. Author Stacey L. Bradford provides advice for two possibilities.
If you sell your home first, she says, you'll have the cash needed to make the transition, but you'll be homeless until you're able to close on the new property.
- In some cases, you may be able to stay in your existing home by renting it back from the new owners.
- If this isn't an option, you'll need to find temporary quarters: rent an apartment, stay in a hotel, move in with friends or family.
Neither option is ideal, especially since you'll likely have to move your stuff twice. But financially, this is by far the smartest choice.
If you buy your new home first, you can end up in a cash crunch, especially in this current market. If you don't have enough in savings, you'll need to borrow money until you can sell your existing home. You can tap into your home equity, take out a “bridge loan”, or (as a last resort) borrow from your retirement savings. Run the numbers through your own spreadsheets or mortgage calculators and understand what you might be getting yourself into.
When Kris and I bought the house we live in now, a sympathetic banker gave us a home equity loan to provide a temporary cash infusion despite the fact we intended to close the loan in only a month or two. (She wasn't supposed to allow such a loan if she knew it wouldn't be long-term because the bank would lose money. We're grateful she did anyhow.)
Your best option, of course, is to plan your move, and to save up enough cash to be able to buy your new home first. This isn't always possible. And in the current real estate market, it's difficult to know just how much you'll need to save. My youngest brother bought a new home before selling his old house, and has been carrying both mortgage payments for two years. The last I heard, it's possible that he'll lose both houses.
[Smart Money: Selling your home while buying a new one]