Not long ago, we blogged about things homeowners should consider if they’re looking to downsize, upsize, or possibly relocate out of state. If that sounds like you, you’d be forgiven if you thought the home buying process the second time around would be a breeze. But a lot has likely changed since your first home-buying experience.
You’ve been down this road before
In general, second-time homebuyers might have more insight into the process than first-timers, but that doesn’t mean you won’t be facing a whole new set of challenges. Before we get into what’s new, let’s cover the two most important basics that apply for every home buying situation:
Find an experienced home loan professional
When you bought your first home, you were probably transitioning from a rental to a mortgage. This time it may be a little more complicated. That’s why working with a reputable lender and an experienced loan officer is absolutely critical, especially if your situation could have you managing two financial transactions simultaneously. Plus, the advice of a skilled mortgage professional is invaluable when it comes to choosing the best loan structure for your set of circumstances.
Get pre-approved first.
Since your first mortgage, pre-approval standards have likely gotten more strict. Additionally, you can now do the entire process online, and get an underwritten pre-approval turned around in hours rather than weeks. Not only does this speed up the whole home-buying experience, but it also tells you exactly how much you can comfortably borrow so you don’t waste your time looking at homes that are way out of range. Some qualities that will put you in a better position for pre-approval:
- Having a good credit score, typically above 640
- Earning a steady income, and the documentation to prove it
- Being as close to debt-free as possible, or at least having a debt-to-income ratio (DTI) of around 36% or so
Once you have a lender and loan officer to work with, and you’ve gotten a pre-approval, it’s time to go home shopping. But the next question is, should you buy your new home before — or after — putting the current one on the market? Let’s look at those two scenarios.
You’re buying home #2 before selling home #1
The stress of carrying two mortgages at the same time is a lot for the average person. If you plan to buy the new home before selling your current one, add up the required down payment and anticipated closing costs upfront. If things look like they’ll be a little tight financially, consider the following approaches to see which — if any — might alleviate the situation:
- Make a “strings attached” offer: This approach typically works best when sellers are less likely to get multiple offers. When you find a house that strikes your fancy, make an offer with a “sale and settlement” contingency, meaning you’ll go through with the purchase only if you can find a buyer for your existing home. That doesn’t mean the new home is yours, though. The seller can still seek other offers. And it’s risky because, in a buyers’ market, you might also have a hard time selling. But when it works, it takes off a lot of the pressure of carrying two mortgages.
- Ask for a cushion: Confident that your current home will sell quickly, but still need a little extra time to pull together the down payment and closing costs for the new place? Ask to push out the closing date of the one you’re buying. This way, you can use some of the profits from the sale of home #1 to cover the financial requirements of home #2. Again, this approach works best in a buyers’ market.
- Tap into your home equity: You would expect that coming up with a down payment for a second home would be easier than doing it the first time. But that’s not always the case. On top of closing costs, you may also need a little extra in your wallet to cover a transition period where you might need to find accommodations for a week or so. Consider borrowing against the equity in your current home by applying for a HELOC, or home equity line of credit. This will give you access to some money for the down payment of your second home, and you can pay it off when your home sells.
- Rent out your first home: If you don’t need the profits from the sale of your first home to make your down payment on the new one, consider renting it out. If the market’s right, this would allow you to cover the first home’s monthly mortgage payments while buying the second. And it’s a lot less tricky than buying and selling at the same time.
You’re buying home #2 after selling home #1
Maybe you’re planning on selling your current home before buying a new one. The significant benefit of this strategy is that you’ll know exactly how much equity is available to put toward your new home. And don’t discount the fact that it can be infinitely less stressful to finish one transaction entirely before diving into the next. Still, it may not be so clean-cut: Any gap between closing dates could force you to find short-term accommodations, and those costs can add up. Here are a few tips on dealing with that situation:
- Don’t be so motivated: Nothing prompts a low-ball offer more than finding out that the seller is motivated to move fast because they’re already under contract with another home. By selling one house before buying another, you get the luxury of time plus room to negotiate. You won’t feel the need to jump on the first offer that comes your way and, because you’re not under pressure to sell, you might be able to ask for a higher price.
- Make a pit stop: Moving twice is never fun, but doing so can take the pressure off and give you the time needed to find the perfect next home. And with Airbnb-type rental options readily available, finding an interim place to stay while you shop for your next home is pretty simple. This is especially handy if you’re relocating far away or to an area that you’re not yet super familiar with.
- Rent from yourself (sort of): If you find yourself in a scenario where you sell your first home before you can move into the second, why not ask the buyers to let you stay on for a month or two after closing? Sounds odd, but it’s more common than you might think. To do this, you’ll need a “rent-back agreement,” in which the buyers take on the role of your landlord, and you become the tenant for a short time. Sure, you’ll pay a little bit of rent, but it’ll buy you some time until you can get the keys to the new house.
Don’t rule out mortgage assistance
The term “first-time homebuyer” can be misleading, especially when it relates to first-time homebuyer and down-payment assistance programs. That’s because many of these programs are available to more than just those who have never, ever owned a home.
Could you be considered a first-time homebuyer and be eligible for a mortgage assistance program? The answer is “yeah” if you meet any of these criteria:
- You and/or your spouse have not owned a primary residence in the past three years
- You’re a single parent or displaced homemaker whose only previous homeownership was with a former spouse
- The only place you’ve owned had no permanent foundation, like a mobile home
- You previously owned a home, but it was not in compliance with state, local or model building codes, and that property could not be brought into compliance for less than the cost of constructing a permanent structure
If you fit the bill, do yourself a favor and check out our recent blog post on seven great first-time homebuyer programs.
OK, no more procrastinating. Get moving.
As you can see, veteran homeowners have a few things to catch up on before jumping into the deep end. It’s always a more straightforward process with our mortgage professionals, so to get started, find a loan officer in the area you want to buy.
And although you may be a professional at this moving thing, our moving checklist is an excellent resource for decluttering, packing, moving, unpacking, and settling in. Enjoy!