The Complexities of Selling Two Houses to Buy One Home
When some mature couples marry or decide to live together, they may each own a home which they need to sell. As they start their new life together, they want to share it in a home they have bought jointly.
When a couple is in the beginning stages of selling two houses to buy one, they often attach themselves initially to the wrong game plan. The game plan is usually to buy a home, followed by selling the other two houses. That plan makes logical sense but it is not the way that selling two houses to buy one home works out for most of us.
Here are two common ways couples can go about selling their homes in order to buy a new one together, plus an explanation of the pros and cons with each.
1. Buying First, Selling Second
The first problem with that kind of plan is getting qualified for a mortgage. Obviously, if two sellers are each selling a home with the intention of buying one home together as a couple, and financing is not involved, it's much easier.
Sellers with free-and-clear homes or homes with enough equity to generate cash to buy a home outright have more freedom to follow this option. But the reality is most people take out a mortgage to buy a home. Which means the parties may need to qualify for the mortgage on top of being able to afford a mortgage payment on two other homes.
After adding the new mortgage payment to the two existing mortgage payments, that ratio amount in proportion to income might push both parties out of the range to qualify. Lenders use ratios, which are percentage amounts for both the front- and back-end.
Problems With Front-End Mortgage Ratios
The front-end ratio is a percentage of mortgage payments to combined gross monthly income. The back-end ratio is the percentage of mortgage payments coupled with additional debt such as credit cards against combined gross monthly income.
If the ratios are too high, the parties will not qualify to own all three homes at the same time. "Aha," you might say, but the parties can convert those homes into rentals and use that rental income to offset the mortgage payments, right?
While that would increase the income, which would lower the ratio, the lender most likely will not allow the rental income to be used in the calculation. Most lenders follow strict guidelines regarding the length of time the home must have been rented to qualify for rental income in a mortgage calculation, and one month or two is insufficient.
Problems With Down Payments
The second problem with buying a home followed by selling two houses is the fact that if the down payment for the new home is coming from the sale of the other two houses, then sellers would probably need to write a contingent offer. A contingent offer gives them a way out, a way to cancel the purchase, and many sellers don't like contingent offers for good reason because they are not always a sure thing.
If the market is not conducive to contingent offers, that could further complicate this strategy. In a seller's market, for example, contingent offers can be fairly difficult to get accepted. If the intended purchase is a highly desirable home, there could be multiple offers, and contingent offers almost never win in a multiple-offer situation.
2. Selling First, Buying Second
Whether a couple would need to sell both houses or just one house to combine households in a new home depends again on the mortgage ratios. It might be possible to sell only one house before buying a new home. A mortgage lender can best advise in this situation.
However, if it is necessary to sell both homes before buying a new home, then there are three basic sub-choices:
- Sell existing homes with a contingent contract allowing the sellers a certain period of time to buy a new home and enter into a purchase contract, or
- Sell existing homes with a rent-back option after closing to give the sellers time to find a new home to buy and move.
- Sell both homes, move elsewhere and then hunt for a new home, which involves moving twice. This last option is the best from a financial point of view because a seller would have no contingencies and be in a stronger position to negotiate the purchase of a new home. But realistically, most people do not want to move twice. Moving once is often hard enough.
If sellers do choose to write contingent offers, if they are selling in a seller's market, it will be easier to dictate terms to a buyer than if they are selling in a buyer's market. In a seller's market, buyers are often much more willing to wait for a seller to find a home to buy than the other way around. It's a safe way for sellers to plan to buy a new home because there is no risk to the sellers if they can't find a new home to buy.
The downside, of course, is the sellers could find their dream home and then be unable—for a variety of reasons that could range from price to condition to location—to sell their existing homes. Losing a dream home can be painful. An experienced real estate agent who handles these types of transactions should be able to assist and make the process seamless.
At the time of writing, Elizabeth Weintraub, BRE # 00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.
Consumer Financial Protection Bureau. "What Is a Debt-to-Income Ratio? Why Is the 43% Debt-to-Income Ratio Important?" Accessed Feb. 24, 2020.
Mortgage Calculator. "Calculate Your Debt-to-Income Ratio." Accessed Feb. 24, 2020.
New Castle. "Can I use future rental income to qualify for a mortgage?" Accessed Feb. 24, 2020.