The best sequence of steps depends on your situation.
Enough Income and Cash:
In the most favorable situation, you have enough income to carry two mortgages;
and enough cash to meet
the cash required to purchase the new house without having to use any of the
equity you have in the old one. In this case, you would buy your new house
first. Once you have it under contract and the new mortgage arranged, you put
your old house on the market, setting a closing date beyond the closing on the
new house. That way, you can stay in your old house until you are ready to move
into the new one.
Enough Income, Not Enough Cash:
In a less favorable situation, you have enough income to carry two mortgages, but not enough cash to close on
the new one. You need to cash-out some of the equity in your existing house. The
simplest way to get it is to take out a home equity line of credit (HELOC) on that house. Then, you have the same flexibility as in
the first case. You can take
whatever time you need to find the house you want to buy, following which you
sell the old house and pay off both mortgages.
It is a good idea to take out the HELOC well
in advance of your purchase, leaving most of the line unused until you need it.
Lenders don't much like writing a HELOC that will be fully repaid in a few days.
Not Enough Income or Cash:
In the least favorable case, you don't have enough income to carry two mortgages,
or enough cash without the equity in your current house. This means you must
sell before you can buy. You can still avoid the nightmare of having no place to
stay, however, if the closing date on the sale comes after the closing date on
the purchase. That way, you can remain in
your existing house until you move into the new one.
The new lender will disregard the old
mortgage in qualifying you because you have a contract to sell the old house,
which will pay it off.
The burden is on you, however, to produce an
acceptable contract of sale. Most lenders will insist that the contract include
a significant non-refundable deposit by the buyer, and have no escapes for the
buyer such as a mortgage contingency clause.
An unconditional contract of sale also will allow you to cash out some of the
equity you have in your existing house with a short-term loan from a bank,
called a “bridge loan”. The loan bridges the period between the closing on your
new house purchase, and the closing on your existing home sale. The bridge loan
is repaid when you sell. See Buying a
New House Before Selling the Old One.
Copyright Jack Guttentag 2007