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Tips on making the simultaneous process of buying and selling homes less stressful

A few options for people buying and selling homes simultaneously are bridge loans and rent back. (John G Mabanglo/EPA-EFE/REX/Shutterstock)

In an ideal world, every real estate transaction closing would sync so that every buyer could rely on the proceeds from the sale of their property for the down payment on the next.

But whether the housing market is slow or fast, there are so many moving parts to every real estate deal that coordinating settlements to every party’s satisfaction can be nearly impossible.

We asked three experts for advice on how to make the decision about whether to sell or buy first in today’s market: Kevin Parker, vice president of field mortgage origination at Navy Federal Credit Union in Hyattsville, Md.; Scott Lindner, national sales director at TD Bank in Philadelphia; and Craig McCullough, a real estate agent with the Catalyst Group of Compass real estate in Washington, D.C. All three responded via email, and their comments have been edited.

How common is it to be able to coordinate the closings for a sale and a purchase?

Parker: Coordinating the closings this way can be a challenge, but we do it all the time. It helps to use the same settlement agency for the sale of your old home and the purchase of your new one. If you plan on using the proceeds from the sale of your home for your next down payment, talk to your lender as soon as possible.

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Lindner: In a normal market, it’s very common to coordinate closings for the sale of a current home and the purchase of a new one. Many times, the closings can be done on the same day or just a few days apart. But this market is anything but normal. If you don’t have contingencies in place, you could end up selling your current home and struggling to find a new one due to low inventory or high prices. So, it’s incredibly important to closely coordinate the closing date with your buyer, seller, lender and closing attorney, making sure you're prepared with all the paperwork you need to make the process as seamless as possible.

McCullough: What you are proposing is considered a coinciding settlement. This has become an increasingly difficult and stressful process to do without the use of some special programs or clauses in the contract. Often, sellers can request a rent-back to allow them to “sell” their current home but remain in it for a determined period and then settle on the purchase of their new home.

What are the options for sellers who need those funds to buy their next home? Are there any mortgage solutions that can help make the transition?

Parker: Homeowners can tap the equity in their home and use the money from a home-equity loan to fund the down payment and closing costs of another home. In addition, some lenders offer low or zero down payment loan options that can minimize upfront costs. For instance, Navy Federal offers what we call a Homebuyers Choice loan, which offers 100 percent financing and can be a great choice for first-time home buyers or those waiting on the funds from a sale.

Lindner: There isn’t a mortgage solution that can address this challenge unless you have the income to cover two mortgages at the same time. In this seller’s market, your best option is to first find a home you want to purchase and get in your offer. In this market, getting your offer accepted is the most difficult part of the equation. Simultaneously, work closely and strategically with your Realtor to navigate and manufacture the timing of your new purchase and the sale of your current home to make sure you have money for a down payment. For example, a “concurrent closing” clause may be added in the contract of your new home that outlines that the purchase depends on your ability to sell your old home. In this market, sellers may not be willing to sign off on this, but your Realtor can negotiate these contingencies into the contract if the seller is willing to do so and it’s the best way to ensure you have the funds to put toward the down payment of your new home.

McCullough: If a seller needs to buy a home before they can sell, there is an option in bridge loans. Bridge loans allow buyers to borrow against the equity in their current home to purchase their new home and then they pay off the bridge loan after the first home sells. The stress of this process is that you must carry two mortgages until the first home sells. Compass bridge loans offer a program where sellers can have Compass pay the mortgage on their first home until it sells and then get reimbursed at settlement with no additional fees.

Another option for sellers that can afford it is to purchase the new home using a low down payment loan, then once the first home sells they can make a large lump sum payment toward the principal balance of the new mortgage and ask the lender to recast the loan. This usually involves a small fee, and the loan must be held by a lender that allows this to happen. It’s important to work with your mortgage broker if this is the plan from the beginning. They can set up the sale of the mortgage to a noteholder that allows this and understands it’s likely to happen. The home buyer must also qualify to carry both mortgage payments during the overlap time.

When should someone consider selling their home first? What are the disadvantages of that choice?

Parker: In this seller’s market, selling a home first may be easy, but finding a new one has been challenging for many buyers. Selling before buying adds another layer of pressure for home buyers. For that reason, we see a lot of homeowners sell their home with a rent-back option. This allows the seller to live in the home a little longer while they search and settle on a new property.

Lindner: You want to consider putting your house up for sale first when you are in a buyer’s market, where there’s plenty and sometimes excess inventory for sale in the marketplace. During a buyer’s market, it may take an exorbitant amount of time to sell your home, so you should start that process first. Once you’ve entered into a contract to sell your home, you should easily find a new home to purchase given the available inventory. The disadvantage of selling first in a buyer’s market is that the buyer can more easily leverage around their own terms, given the ability to readily find another home.

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McCullough: When a bridge loan is too expensive or they have insufficient equity to qualify for this type of loan, they should consider selling first. Disadvantages for this mean that you likely have more contingencies when offering on your next home. A couple of options that make this more workable are to require a rent-back in the sale of your home or include a “house of choice” clause in the sale of the current home. The house of choice clause allows the seller a determined time to find a new home and get under contract; otherwise, the seller can void the contract and keep their current home.

When should someone consider buying their next home before selling? What are the pros/cons of that choice?

Parker: There’s a lot of competition in this seller’s market, and buyers often feel the pressure to buy as soon as possible. Ratifying a purchase contract in today’s environment is a win. The challenge with buying a new home before selling is the ambiguity that comes along with coordinating settlements and a limited supply of homes on the market. Sellers also lose some negotiating leverage if they've already purchased a new home.

Lindner: You want to consider buying your home first when you are in a seller’s market, where there’s little inventory for sale and buyers are scrambling to find a home to purchase. For example, buyers purchasing a home during today’s market — a seller’s market — may face a lengthy process. Contracting to purchase a new home before selling can provide some comfort that you will have a place to live when you put your current home on the market and won’t have to pay for temporary housing and storage facilities, which add expense to the overall moving process. The additional protection you have is that you will most likely be able to quickly sell your own home and align the closing of your sale along with your purchase transaction.

As with any situation, there are downsides to buying your next home before selling your current one. For example, if an individual buys a new home before selling their current one, they risk owning two homes simultaneously, making them responsible for two mortgages. This could be financially straining, particularly if you're having difficulty attracting buyers for your old home. Additionally, you must prove through financial documentation to a lender that you can manage two mortgages at once.

McCullough: This is likely the best route to take and utilize the benefit of a bridge loan. The biggest con is the cost of a bridge and the expense of carrying multiple mortgages during the transition period. The big pro of using the bridge loan is that it removes the need for a “home sale” contingency. There is also some benefit in easing the timing of transitioning houses.

No situation is the same, so buyers and sellers need a good Realtor and a good lender involved to make sure all their options are laid out well in advance of making the move.