Deciding whether to purchase a new home before selling your current one or vice versa is a common dilemma for homeowners. There's no definitive right or wrong answer; the key is to approach the situation with organization and effort equally devoted to both selling your current home and purchasing a new one.
Working with a qualified real estate broker can be invaluable due to the complexity involved in such a real estate transaction. This expert can effectively manage both the sale of your current property and the search for a new one, reducing the stress associated with handling these tasks simultaneously. This approach aims to minimize disruptions to both your professional commitments and personal life.
Let’s explore everything you need to know about the subject.
Buying and selling a house simultaneously: a complex process
Buying and selling a house simultaneously is a complex process that requires careful planning and consideration. Each of these transactions involves its own set of challenges, and managing both concurrently surely intensifies the complexity.
Before diving into your real estate endeavours, it's wise to assess the market conditions in your area. Start by obtaining an appraisal of your current property to determine its potential selling price. Many real estate agencies provide complimentary property valuations, making it beneficial to consult with a qualified real estate broker.
After appraising your current property, the next logical step is to survey real estate listings. This process allows you to explore available properties that match your criteria and understand their market prices.
Ideally, every homeowner would seamlessly transition from selling their current home to purchasing a new one without experiencing any gaps in between. However, achieving this smooth transition is often challenging in practice. The key question then becomes: what is the optimal approach to proceed with these transactions?
What’s the best approach for selling your current home before making a new purchase?
Before deciding whether to sell your current home before buying a new one, it's crucial to strategically assess your unique circumstances. If there is a wide selection of suitable properties for sale in your area, selling your current home first offers several advantages. Here are the 3 main advantages:
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Selling your home first allows you to wait for the ideal buyer and a favourable price, avoiding the pressure to accept lower offers.
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Once your current home is sold, obtaining a new mortgage for your next purchase becomes easier and more straightforward.
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Making an offer to purchase on a new property without the contingency of selling your current home increases the chances of acceptance by sellers.
However, selling your home before buying a new one carries the significant risk of potentially being without a place to live if you haven't secured a new home in time.
Additionally, there could be additional costs to consider, such as renting storage space for your belongings until you find a new home. These costs can accumulate and have an impact on your budget during the transition period.
How can you purchase a house before selling your own?
In a competitive residential market where homes sell quickly, you might choose to purchase a new house before selling your current one.
In this situation, it's essential to structure your offer to purchase with a contingency clause that depends on the sale of your current home. This contingency acts as a safeguard, protecting you from potential financial challenges if you have difficulties selling your property within the expected timeframe.
Moreover, one of the main obstacles you may face when purchasing a new home before selling your current one is the challenge of obtaining mortgage financing from your bank, especially if you still have an outstanding mortgage balance. That is why it's essential to communicate proactively with your lender before proceeding with your plans.
Buying and selling simultaneously: 4 tips to manage your mortgage
Many homeowners wonder about the implications of selling their home before fully paying off their mortgage. It's important to understand that you have the freedom to sell your home at any point, regardless of whether your mortgage is fully paid off.
In today's housing market, it's becoming less common for individuals to stay in the same property for their entire lives. Mortgages typically have amortization periods ranging from 20 to 25 years. However, life circumstances often change, prompting the need to sell a property before the mortgage is fully paid off.
Here are four options for homeowners who sell their home before paying off their mortgage:
- Pay off the remaining mortgage balance.
- Transfer your mortgage to your new home.
- Use a bridging loan.
- Allow the buyers to take over the existing mortgage.
1. Pay off the remaining mortgage balance
This option involves paying off the remaining mortgage balance, which depends on the equity you've accumulated over time. Equity signifies the value of your home that you fully own.
For instance, if your home is valued at $350,000 and your mortgage balance stands at $20,000, your equity amounts to $330,000. Negotiating early mortgage repayment is typically simpler with a smaller remaining balance.
If your goal is to pay off your mortgage early but you have limited equity, it might be prudent to delay selling your home and focus on improving your financial position first. Early repayment penalties can be substantial. To expedite your mortgage repayment, you might consider:
- Increasing the frequency of your payments
- Increasing the amount of each payment
- Exploring prepayment opportunities
If you anticipate selling within the next four years, reaching out to your lender promptly can help you adjust your payment plan or renegotiate mortgage terms to minimize potential penalties.
2. Transfer your mortgage to your new home
The second option involves transferring your mortgage to your new home. Before proceeding, it's essential to carefully review the terms and conditions of your current mortgage. Some mortgages offer a portability feature that allows you to transfer the existing balance to a new home without facing prepayment penalties.
A transferable mortgage allows you to maintain the same lender, interest rate, and remaining term on your loan when moving to a new home. However, it's important to note that there could be banking, and administrative fees associated with the transfer procedure.
When transferring your mortgage, your lender will typically assess the loan-to-value ratio of the new property to ensure it meets their criteria, often necessitating an appraisal.
Good to know: Most variable rate mortgages do not offer the portability feature.
3. Use a bridging loan
A bridging loan is a short-term financing option designed to cover the gap between purchasing a new property and selling your current home. Typically ranging from 90 days to 12 months, with 120 days being most common, these loans are particularly useful in fast-moving real estate markets where quick action is essential.
However, before choosing a bridging loan, it's essential to weigh its pros and cons carefully. If the sale of your current home doesn't proceed as anticipated, you may end up managing two mortgages simultaneously: your original mortgage and the bridging loan.
4. Allow the buyers to take over the existing mortgage
This option is known as mortgage assumption or an assumption agreement. A seller may choose mortgage assumption for various reasons:
- They need to sell quickly, and view offering a favourable mortgage to attract buyers and expedite the sale.
- If they are struggling to find a buyer for their home, offering mortgage assumption could enhance the property's appeal.
- They aim to maintain their asking price and use advantageous mortgage terms as an incentive for potential buyers.
What are the risks of this type of financing?
It’s important to note that your lender can decline the transfer of your mortgage if the buyer doesn’t meet their criteria. Even if the transfer is approved, there may be legal and administrative fees associated with the process. Therefore, it's wise to conduct thorough research and understand these potential costs before offering this option to your buyer.
Moreover, even after the mortgage is transferred, you could still be held liable if the buyer defaults on payments. To protect yourself, it's essential to obtain written confirmation from your lender stating that you are released from any liability once the transfer is completed.
Are you looking to buy and sell a home simultaneously?
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