In November of 2012, the house next door to my parents went up for sale and my wife and I were instantly intrigued. We joked around about buying it at first, but we had just bought a second car and decided we probably wouldn’t be able to talk ourselves into it before the house ended up selling anyway. Well, about four months have passed and the price of the house had dropped a bit over that time. My wife brought it up again, and we decided to entertain the idea, at least. Then once we did a little research and financial math, we made an offer on the home and we’re currently a little more than a week away from taking possession of the home.
First, to address the whole “living next to Mom and Dad” thing. Doesn’t bother me at all, and the entire thing was my wife’s idea, so she’s okay with it as well. Other than the selfish reasons such as easier child-care for our future children and more of Mom’s home-cooked food, I’m just happy to have the opportunity to be close to Mom and Dad. They might not live next door forever – Dad might retire in five or ten years and the folks might pack up and head off somewhere else. In the meantime, we’ll enjoy this opportunity to be close.
As I said, I had to do a bit of research on home-buying. I’ve bought a home before, but buying your first home compared to your second home is a completely different beast. There’s trying to figure out how much house you can afford, how much a bank will loan you, and of course what to do with the house you’re living in right now.
Sell First, Then Buy? Or Buy First, Then Sell?
Since I bought first, that’s really mostly what I’ll be talking about here. In reality, you should almost always sell your current home first and then buy. That wasn’t an option for me, because there was a specific house my wife and I wanted, and if we didn’t get this house, we weren’t going to move at all. We were/are quite happy with our current living arrangement.
The obvious benefit to selling first is that you avoid having to pay two mortgages at the same time. You do run the risk of being temporarily homeless if you need to close on the sale of your current home before you’ve closed on a new home, but most people find that preferable to the whole double-mortgage issue. A nice storage unit could be had for $100/month or less and you and your family could certainly find some temporary living digs either with a family member or, at worst, a motel.
Buying First: Pre-Approval from a Lender
So I wasn’t able to talk you out of getting yourself into this mess. You found your dream home and you want to make an offer on it. First, you need to obtain a Pre-Approval Letter from a lender. For most home-buyers, this would be no big deal. Not for you, my friend. Since you haven’t sold your first home, the payments you make on your current mortgage actually count against you when they calculate what’s called a “Back-end Ratio,” which is essentially all of your debt payments added together and divided by your gross income. This percentage needs to be no higher than 36%. This is where most people who are attempting a “buy before sell” transaction will hit a road block. Essentially, the bank has to qualify you for an amount greater than the two mortgages put together (exe: you own a $100,000 home and want to buy a $200,000 home. You would have to qualify for a $300,000 loan based on your income and debts).
Buying First: Reserve Requirements
Reserve requirements are something new since the last time I bought a home. In mortgage lending terms, “reserve” is an amount of cash the lender requires you to have on hand before they’ll close your loan. I’ve heard of buyers having a reserve requirement even when they sold their current home before buying a new one, but it seems to be more often required for folks who will at least temporarily have two mortgages.
The reserve that I was required to have was six months worth of mortgage payments on both mortgages. Your 401k balance actually contributes to this reserve if you don’t have the cash on hand, with the assumption being that you’d tap into your 401k before you’d allow yourself to lose your house.
Did I Mention about Paying Two Mortgages?
Paying two mortgages is going to be stressful no matter what your situation. At the end of the day, you’re paying money for a house you’re no longer living in. Even if you can squeeze it into your budget, it’s still a losing situation. In my case, I’ll be paying about $700/month for a house I’m not living in. About $100/month of that will be adding to my principle and I’ll get it back. The rest is pretty much going into a black hole. Oh, and there will be some residual utility bills for the old place as well (they like to turn the lights on when they’re showing a house for some reason).
How long will your old home be on the market before sale? It’s hard to tell. You might get lucky and sell it in a couple months, or it could take a year. I saw a condo for sale in my city today that has been on the market for about 14 months. Thankfully, most of them (and especially the ones in my area) seem to be selling within 3-4 months max. We’re crossing our fingers!
It’s not all bad…
For fear that this entry will come off too negatively, there are (of course) benefits to buying prior to selling. Obviously, you avoid the whole temporary homelessness thing. And actually, we anticipate moving into our new place will be a lot simpler. We’re taking possession on a Monday, so we’ve figured that we’ll just truck our boxes to the new place throughout the week after work and then rent a Uhaul to get the rest over the weekend. There are really no deadlines, since we’ll completely own both places. Heck, we don’t even have to move all the stuff out of our old place right away anyway. So it does make for a less stressful moving day.
When it’s all said and done, though, you accept the consequences when you want something badly enough. Money will certainly be tight for a little while as we’re paying two mortgages/utilities/etc, but we’ve done the math and it is doable. And as long as it’s doable, we’ve decided that this is worth doing.