If you already own a home, both strategies have their pluses and minuses.
Financially, home buyers looking to move-up have a much easier time than first-timers, who are trying to scrape up enough cash to cover a down payment and closing costs. But trade-up buyers face a whole new complication: Buy first or sell first?
This strategy makes the most sense if you’re in a hot market where homes are going fast and you can buy with cash or you’re in a quiet market where sellers don’t have many choices and will be anxious to accommodate you, say, if you want to make your purchase offer contingent on the sale of your previous home.
The main risk here is that you could get stuck making payments on two houses if your former home doesn’t sell before you close on the purchase of the new one. Plus, you will have to come up with the cash for a down payment.
Many people use their home-equity line of credit as a “bridge” or “swing” loan to make a down payment. But you need a robust income to qualify for payments on up to three mortgages: the old mortgage, the line of credit and the new home mortgage.
The lender will probably turn you down for the new mortgage if the monthly payments on all three (plus any other outstanding debt) total more than 36% of your gross income (in some cases lenders may stretch the maximum to 45%). The monthly burden of payments could force you to jump at a low-ball offer for your former home– and you can expect such offers once buyers tour your empty house and realize you’re under the gun to sell.
Renting out your former home is another option, and maybe a better financial move if the rent checks more than cover the mortgage and the expense of upkeep. Tax deductions could even put you ahead of the game, but be sure to check the requirements if you want to use rental income to qualify for your next home.
If you decide to rent out your old house, most lenders will consider up to 75% of rent payments as income, as long as you have a signed lease.
Why not just make your offer to buy a new home contingent on selling your old one? Because if sellers receive multiple offers, they won’t even consider yours. They won’t want to waste their time on an offer that may fall through.
Real estate agents prefer that you sell first and put off serious shopping until after you’ve accepted an offer on your current home. That’s safer for them: They don’t want to waste their time nor risk loss of commission check.
Trouble is, if you’ve already agreed to vacate your home in 60 days, you could feel tremendous pressure to settle for a house that falls short of your ideal. And if the sellers of the house you want know you need to find a home quickly, it can be all that much harder to negotiate a good price.
If you sell first, you can take some of the heat off by negotiating better terms for your home sale.
Aim for a longer period until closing — say, 90 days instead of 60 — or ask the buyers if they would consider a short-term rent-back to you for another month or two after closing. (They may agree to your terms if it’s a seller’s market or they really want your home). Offer a security deposit — say, a couple of thousand dollars — and a daily rent that covers their new mortgage costs. Both parties should check with their homeowners insurance company to make sure their homes and possessions are covered during a temporary rent-back.
Information from: http://www.kiplinger.com/article/real-estate/T010-C000-S001-buy-first-or-sell-first.html