Author Topic: Will this work? Buying new home before selling old home  (Read 2313 times)

Fatmouse

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Will this work? Buying new home before selling old home
« on: July 14, 2016, 08:19:53 AM »
I am looking for Mustachian opinions about whether my scheme outlined below will work, and whether it is a good and appropriately Mustachian idea.

My DH and I currently own a condo in the city, and in approximately 2 years we might want buy a single family home.  (This assumes buying is more advantageous than renting for our situation, which I believe it will be.)

We have a specific neighborhood in mind that would allow for a very Mustachian lifestyle.  It is not a huge neighborhood, so there are only about 5-25 houses on the market at any given time, with a lot of seasonal variation.  Houses selling in the slow winter months seem to go for a lower price.  We anticipate we would like to buy the new home before selling the condo, so that we can maximize our flexibility on timing/ we are not pressured to choose among limited options within the timeline of selling our condo.

The tricky part is financing.  Here is the plan:
- Save a 20% down payment for the new home in cash
- Buy new home.  New mortgage plus condo mortgage/ HOAs still keeps us within 43% debt to income ratio
- Sell condo as soon as practicable, but we would potentially have two mortgage payments for a little while

Does anyone see any reason that a bank/ mortgage broker wouldn't let us proceed this way?
Does anyone see any unwise money moves here?

One consideration is that we would have a lot of money (more than half our net worth) in cash and in equity in current condo, which is not making much if any return.  I think the opportunity cost of holding the down payment for new house in cash is significant.  (Target saving for down payment for new house is $100-$120k, so market gains on that amount at 7% per year is what I would consider opportunity cost.)  But I think I would still rather be in a position of strength to wait for a great house to come along and be able to negotiate a good deal on it.

Some context on our overall financial position.  We make over $200k/year right now. Saving this down payment money in cash in a two year timeframe is doable.  We would still simultaneously max out two 401k accounts.  We would have to stop making regular contributions to a taxable brokerage account.  Also, in our current condo, we have $120k equity, so I am open to suggestions for using that equity to finance new home before we sell condo if there is a way to get to it.  I looked in to HELOCs, but I couldn't find info on early repayment penalties and overall I like the cash idea because it seems simpler.

BlueHouse

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Re: Will this work? Buying new home before selling old home
« Reply #1 on: July 14, 2016, 10:02:55 AM »

The tricky part is financing.  Here is the plan:
- Save a 20% down payment for the new home in cash
- Buy new home.  New mortgage plus condo mortgage/ HOAs still keeps us within 43% debt to income ratio
- Sell condo as soon as practicable, but we would potentially have two mortgage payments for a little while

Does anyone see any reason that a bank/ mortgage broker wouldn't let us proceed this way?
Does anyone see any unwise money moves here?

My bank loves it when I borrow more. 

I will just suggest that when you review the loan docs for the new place, make sure there is the opportunity for a FREE recase (reamortization) of the loan.  That way, when you sell the condo, you can put a larger downpayment on the new house and reduce monthly bills/eliminate PMI/eliminate jumbo status.  It's not uncommon as many people buy before they close out on their old houses. 

Fatmouse

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Re: Will this work? Buying new home before selling old home
« Reply #2 on: July 14, 2016, 11:51:25 AM »

The tricky part is financing.  Here is the plan:
- Save a 20% down payment for the new home in cash
- Buy new home.  New mortgage plus condo mortgage/ HOAs still keeps us within 43% debt to income ratio
- Sell condo as soon as practicable, but we would potentially have two mortgage payments for a little while

Does anyone see any reason that a bank/ mortgage broker wouldn't let us proceed this way?
Does anyone see any unwise money moves here?

My bank loves it when I borrow more. 

I will just suggest that when you review the loan docs for the new place, make sure there is the opportunity for a FREE recase (reamortization) of the loan.  That way, when you sell the condo, you can put a larger downpayment on the new house and reduce monthly bills/eliminate PMI/eliminate jumbo status.  It's not uncommon as many people buy before they close out on their old houses.

Great tip!  I did not know that one could "recase" a loan for free and lower minimum monthly payments without a full refinancing.

BlueHouse

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Re: Will this work? Buying new home before selling old home
« Reply #3 on: July 14, 2016, 12:22:27 PM »

The tricky part is financing.  Here is the plan:
- Save a 20% down payment for the new home in cash
- Buy new home.  New mortgage plus condo mortgage/ HOAs still keeps us within 43% debt to income ratio
- Sell condo as soon as practicable, but we would potentially have two mortgage payments for a little while

Does anyone see any reason that a bank/ mortgage broker wouldn't let us proceed this way?
Does anyone see any unwise money moves here?

My bank loves it when I borrow more. 

I will just suggest that when you review the loan docs for the new place, make sure there is the opportunity for a FREE recase (reamortization) of the loan.  That way, when you sell the condo, you can put a larger downpayment on the new house and reduce monthly bills/eliminate PMI/eliminate jumbo status.  It's not uncommon as many people buy before they close out on their old houses.

Great tip!  I did not know that one could "recase" a loan for free and lower minimum monthly payments without a full refinancing.
recase should read "Re-Cast".  sorry!

KBecks

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Re: Will this work? Buying new home before selling old home
« Reply #4 on: July 16, 2016, 10:33:48 AM »
How long can you mange two mortgage payments before it stresses you out? 

Just have enough cushion money available so you can pay those 2 payments and not freak, what if selling your condo takes longer than expected?

Roadsidetreasurehunter

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Re: Will this work? Buying new home before selling old home
« Reply #5 on: July 16, 2016, 12:11:46 PM »
If you suspect that it will take longer than expected to sell the condo, would you consider putting it on the market now and renting for a couple years before you purchase your new home?  I've known neighbors who bought a new home before they sold the existing home and it was very stressful.  I wouldn't be comfortable putting myself in that situation, but I can be overly cautious too....just my nature.

Fatmouse

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Re: Will this work? Buying new home before selling old home
« Reply #6 on: July 17, 2016, 04:26:41 PM »
How long can you mange two mortgage payments before it stresses you out? 

Just have enough cushion money available so you can pay those 2 payments and not freak, what if selling your condo takes longer than expected?

Too many variables to be sure, given this potential move is about two years away.  I imagine I would want to go into this expecting to pay both mortgages for two months, feeling OK about four months, and truly stressed only at six months.

I live in a pretty large building, so something is always for sale here.  I will start paying more attention to how long they are taking.

Fatmouse

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Re: Will this work? Buying new home before selling old home
« Reply #7 on: July 17, 2016, 04:33:19 PM »
If you suspect that it will take longer than expected to sell the condo, would you consider putting it on the market now and renting for a couple years before you purchase your new home?  I've known neighbors who bought a new home before they sold the existing home and it was very stressful.  I wouldn't be comfortable putting myself in that situation, but I can be overly cautious too....just my nature.

Interesting idea.  We could potentially rent out the condo and simultaneously rent a place in the new neighborhood to make sure we like it.  If when the time comes I have doubts about the plan, financial or otherwise, this may be an idea I come back to. 

There are some downsides in my situation.  The market rent is pretty much equal to my mortgage payment + HOA.  Also I would be nervous about trying to show a place to sell it with tenants.  And the work involved in being a landlord sounds not my cup of tea.

bye-bye Ms. FancyPants

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Re: Will this work? Buying new home before selling old home
« Reply #8 on: July 18, 2016, 08:51:36 AM »

Does anyone see any reason that a bank/ mortgage broker wouldn't let us proceed this way?


As long as your debt ratio with both mortgages is less then 43% (I believe that's usually the magic number), like Bluehouse said, the lenders would probably love lending it to you! lol

We are sort of in the same boat, not in any hurry to buy/sell. When something comes up that meets our specific criteria though we will have to jump on it & put our house up for sale after the fact. I have spoken to a couple different loan officers and all they keep saying is "oh yea, you all can buy more house!" I keep thinking, thank you, no thank you! ;)

Cassie

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Re: Will this work? Buying new home before selling old home
« Reply #9 on: July 19, 2016, 01:03:29 PM »
WE have done this a few times and it usually works out. However once we lost a ton of $ because the market dropped like a rock before we could sell the house we moved out of.  The rent we could get was much less then our 15 year mortgage so we lost much $.