BUYING A HOME IN COMPETITIVE MARKETS
If you own a home in a competitive market and wish to upgrade in your neighborhood, you may want to buy a new home before selling your current residence. Although there are certainly risks involved, buyers with strong financials can typically make it work. Whether you plan to receive a gift, put down a smaller down payment, or use home equity, make sure to fully understand the financial implications, particularly if you intend to borrow from your retirement plan or take on a variable mortgage.
DON'T START WITH AN OFFER
Regardless of whether you are planning on keeping your existing home, all home purchases should begin with a review of your personal financial situation and involve discussions with your lender before making an offer.
To determine whether you may be able to buy a new home and keep your old one, follow the steps below:
Step 1: Set the budget and calculate your down payment
Review your financials and discuss your situation with your financial advisor. Set a target new home budget that you will be comfortable with the projected monthly payments once your existing home has sold. As your deciding on budget, look at your liquid assets to determine how much cash you have available for a down payment. Many buyers will require a "jumbo mortgage" or non-conforming loan, which means that your loan amount is above limits established by Fannie Mae and Freddie Mac. Most lenders will require a 20% down payment on these loans.
Step 2: Do your home research
Now that you have a budget in mind for the new home, go online to see what you can buy for that amount of money. We suggest buyers go to multiple open houses in this phase to get a sense of what your money can buy. You may need to revisit the budget, reassess your needs, or evaluate the feasibility of staying in your desired neighborhood.
Meet with multiple real estate agents to find the right fit. Invite each agent to tour your home (make sure to declutter and clean!) and request a market assessment for its value and what their sales and marketing strategy would be. Not all agents will agree on the list price so it is important to get multiple opinions. If you're planning on buying and selling, it probably makes sense to use the same real estate agent if you can. Many will reduce their fees or provide a credit at closing. Be sure to ask how quickly they think your property would sell and whether they think any upgrades or repairs are needed.
Finally, discuss your buy-then-sell plans with the new agent. How long do they think it will take to sell your home? Are there any red flags? Is your down payment competitive? Is using a contingency (such as the sale of your existing home) a deal-breaker to most sellers?
Step 4: Investigate financing and speak with lenders
When buying a home it is imperative to shop around before choosing a lender. The interest rates, fees, and products offered will vary considerably with each institution, and frequently by multiple percentage points. Do some online research to view published rate information and generate a list of lenders to contact.
Before reaching out, have all your data on hand and consider making a spreadsheet so you can evaluate homes later. Ask lenders to provide information based on a soft pull of your credit and other information you provide. A hard pull of your credit hurts credit score some, and should be avoided when possible. As long as you are confident in the accuracy of the data you provide, the rate information and options the lender provides should be also. To do this, you'll need your gross income, monthly debts or other obligations like condo fees, and credit score. Also have good estimates ready for what you estimate the property taxes, condo fees, and insurance would be on the new home. This process allows you to compare the rates and products at various lenders without incurring fees or harming your credit.
When you eventually speak with lenders, have your maximum budgeted purchase price in mind for the calculations and down payment amount. Share your plans to buy-then-sell and ask what their debt to income ratio guidelines are. Based on the data you have provided, a lender can likely tell you pretty quickly whether you may qualify while carrying your current home.
Step 5: Do the math
Take your personal information spreadsheet with all of your debt and income information and start to plug in the rates provided by the lender you spoke with that had the best rate or product for your situation. Now that you have a fairly accurate projected monthly all-in payment, are you comfortable with it? Based on your current cash reserves, are you comfortable with making the down payment, covering closing costs, and carrying both homes for a time? Finally, based on a conservative estimate of your existing home's sale price, how much will be left after paying the outstanding mortgage, Realtor fees, taxes, and other selling costs?
Step 6: Get your team together
The last step before seriously looking to buy is to gather your real estate team to assist with the purchase and sale of your homes. Choose a real estate agent, an attorney, and move forward with a lender to obtain a pre-qualification letter.