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Just Say No to the Double House Payment Trap

Written by Guest Contributor - 13 Comments

This is a guest post from Kevin Mercadante of Out of Your Rut. Kevin is a former loan underwriter, and also author of Lighten Your Load, an e-book focused on reducing living expenses while still maintaining a comfortable lifestyle.

The housing market has been down for two years or more in much of the country, but many home buyers are continuing with the practice of buying a new home before selling the old one. While this was a common practice a few years ago in a stronger market, it makes little sense now.

Selling a house in this market is substantially more difficult than buying a new one.

If you insist on delaying the sale of your current home until you put a contract on a new one, then you’ll face the very real possibility of carrying house payments on two mortgaged properties at the same time. This is a situation that should be avoided at all costs in this market.

The downside of the real estate double deal

Below are some common entanglements you might face by not selling your house before buying a new one.

Qualifying for a new mortgage. A mortgage approval is much harder to obtain when the potential exists for carrying mortgages on two houses. Your lender will be aware of the situation, and may be less flexible in your terms. Either that, or they might not approve your loan at all. Since most buyers purchase at the upper range of affordability, the possibility of carrying two properties may be viewed as an unacceptable risk.

Sale of prior residence clause. If the lender wants you to sell your current home before closing on the new one, they will add this condition to your approval. Real estate agents don’t like it, and sellers like it even less. It makes the closing on your new home contingent on the sale of your old one —- a deal dependent on another deal. If your lender requires the sale of your current home, your offer on a new home may not be accepted.

The Simultaneous Close. This is typically the most desired outcome. You close on the old and new homes on the same day. This is the perfect world outcome, but much more difficult to pull off than most people think. It’s very stressful on all parties, and can be sabotaged by a laundry list of potential issues with EITHER transaction. This is the classic, “it ain’t over until it’s over” trap, that may cause sleepless nights and significant delays in closing.

Wiping out your liquid assets. There are numerous expenses that accompany the purchase of a new home that don’t show up on a closing statement. Costs of the move, new furniture, minor repairs to the new home and the “whoops, we didn’t know we would need to buy (or fix) that!” Now add an extra monthly mortgage payment to the mix, and how long do you think your liquid assets will hold out?

A forced rental situation. Renting out your old house to cancel the payment on it might make sense short term, but having tenants will make it much harder to eventually sell your house. Your tenant might not be open to real estate agents showing the house, and also might not keep it in salable condition.

Foreclosure. Carrying two mortgaged properties simultaneously is a major cause of foreclosure. Even if nothing goes wrong, the double payments might prove to be too much for you to handle.

Common reasons for not selling first

Over my many years in the mortgage industry, I’ve heard the following offered as reasons for buying the new house before selling the old one.

“My house is in (pick one) top condition/a top neighborhood/a top school district, so it’ll sell fast.” Most home sellers aren’t objective when assessing the salability of their homes, and tend to be overly optimistic. Note: seller optimism is not a factor in the marketability of your house.

“I don’t want to make a double move.” A double move is a temporary problem, and one you have some control over. It’s not uncommon to go a year or more carrying two house payments! That’s serious money.

“We might not be able to find another house quickly if we sell ours first.” For all the same reasons it’s difficult to sell a house in today’s market, it’s much easier to buy one.

“What if we sell our house, then can’t get a mortgage for one that we want to buy?’ You can and should obtain a mortgage pre-approval before entering into any home buying situation, so the risk here is remote at best.

The unspoken fear of being homeless. Okay, I’ve never actually heard this one, but I suspect that (perhaps in the dark of the night) people might have a pang of fear that selling their house before buying a new one could leave them out on the street. Given that you’ll have a loan pre-approval before doing anything anyway, this isn’t something to be feared — especially not in this market!

The alternatives

Simply getting a contract offer on your house isn’t always sufficient. Contracts can fall through for more reasons than you can imagine, as can the buyer’s mortgage approval. The cleanest way to enter the purchase of a new home is to fully dispose of the old one first. Below are some suggestions on how to accomplish this.

Before using any of these suggestions, it is strongly recommended that you first consult a qualified real estate attorney in your area as laws and practices vary by jurisdiction.

Sell your house with a delayed closing date. You can accept a contract on your current home and set the closing date 30, 45 or 60 days from receipt of a contingency-free mortgage approval from your buyer. At that point, you’ll have a solid buyer as well as time to find your new home, and you may be able to pull off the coveted simultaneous close.

Add a short-term rental provision to the contract on your current home. Add a clause to the sale of your old home that permits you to stay in the house as a rent-paying tenant for 30-60 days following the close. Use this time to secure your next home. You’ll avoid a double move, have the cash from closing in hand, and can make a clean offer on a new property.

Move into an extended stay hotel and put your furniture in storage. This requires a double move, but also eliminates the uncertainty pf being able to sell the old home. It also makes your a more attractive buyer. Yes, it will cost more, but it’s a solid defensive strategy that guarantees you won’t be stuck with two mortgages.

Sell your house, and take a lease purchase on a new home. This strategy also enables you to sell your old home and enter the market as an unencumbered buyer. You get a chance to “test drive” the new house and neighborhood, and you avoid the double move. There are now more lease purchases available than there have been in recent memory, and one might imagine that any property that’s been listed for sale for more than a few months might be a candidate for such an offer even if it’s not being presented as such by the sellers.

No doubt any of the above will create some problems, but you’ll be accepting smaller, short-term problems rather than risking larger, more costly problems later.

Do you know of anyone who’s been trapped with two homes for more than a couple of months? Are you in this position now?

Published on September 10th, 2009 - 13 Comments
Filed under: Mortgages, Real Estate

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13 Responses to “Just Say No to the Double House Payment Trap”

  1. 1
    Ron Says:

    “Note: seller optimism is not a factor in the marketability of your house.”

    That’s the honest truth! I would add — neither is real estate listing agent optimism.

  2. 2
    Jacob E Says:

    We just did something similar to this. We moved into an apartment that is a shorter commute for my wife and we’re attempting to get the house in sellable condition. Paying rent and the mortgage isn’t going to bankrupt us but it is a significant portion of our income. I’m hoping it will sell quickly, but we’ll see.

  3. 3
    Kevin@OutOfYourRut Says:

    Ron–that’s actually no minor point. So many people put themselves in financial jeopardy by being too optimistic in their projections about the outcome.

    When you’re juggling two enormous transactions at once, you really need to consider the potential for a worst case outcome. Not that you should go in expecting it, but rather being prepared to deal with it.

    This is one of those areas where some planning can really make a huge difference.

  4. 4
    Nickel Says:

    Kevin: We had about a 3 day overlap when we sold our last house and moved into the new one. Even then, with a seemingly solid contract in hand, it made me a bit nervous. This was tempered, however, by the fact that the market was still hot at the time (we had an acceptable offer within three days of listing the house, and many others in the neighborhood were selling within a day of listing) as well as the fact that we could’ve easily afforded the payments on both for quite some time.

    To us, the risk of carrying the old house for a few extra months (which would’ve been the absolute worst possible scenario — a much more likely scenario at the time would’ve been an extra month or so to re-list and sell the house) was well worth not having to suffer through multiple moves with four young kids (mainly due to the stress it would’ve placed on the kids).

    In the end, it worked out, but I certainly wouldn’t roll the dice like that in the current market.

  5. 5
    Ellen Says:

    You make many good points, though the one I believe most people fail to consider (even on their first home purchase) is that there are more expenses involved in buying a house than just the mortgage and the closing costs. There are appliances, repairs, utilities, insurance, local taxes, furniture, and decor, that can really add up. This is even more cumbersome if you have the burden of an additional mortgage from your previous home. Be sure before you buy that you take all of these important expenses into consideration and are sure that you will be able to pay them.

  6. 6
    Alexandra Says:

    I know of several people trapped into paying two mortgages for over a year. Both couples were inexperienced “flippers” who thought they could make some quick money. I felt really bad for them – in addition to the huge hit it cost them in terms of finances, the stress they endured during this time was immense, and definitely affected their health.

    I was purposely in the position where I paid two mortages for a month – I wanted to renovate my newly purchased home before I moved in, so we stayed in our old house for a month, then moved in when everything was ready. Yes it cost us an extra mortgage payment, but it was well worth it to avoid living in a dusty, dirty, paint-fume-filled construction zone.

  7. 7
    Kevin@OutOfYourRut Says:

    Alexandra–This is just my experience from being in the business, and the main reason I wrote the article–most people overestimate their understanding of the real estate market. There’s a perception that it’s simpler than it is.

    Often they rely on an experience they had a few years ago, or what their parents and friends tell them. But the market changes, sometimes dramatically, and people’s knowledge tends to lag behind the trend. Selling a house into a weak market is radically different from selling into a strong one.

  8. 8
    Nickel Says:

    I should add… Our former neighbors got stuck with two houses for a year or so. They built houses on the side and when they’d finish, they’d put both their current house and the new one on the market, keeping (and living in) whichever one didn’t sell.

    Unfortunately, they got greedy and built a house they couldn’t afford to live in — right around the time the market tanked. They finished it, put it on the market, and it didn’t sell. They eventually had to put their own home on the market, too, and that one ultimately sold. Since the new house is much more expensive than they can actually afford, it’s still on the market (and *still* hasn’t sold). If/when it eventually sells, they’ll have to move again. I can’t even begin to imagine the financial havoc this has created for them.

  9. 9
    Financial Samurai Says:

    Very good post, and I agree 100%! For some reason, people fall in love with property all the time and literally BLOW THEMSELVES up financially as a result. Good one guys.

  10. 10
    Kevin@OutOfYourRut Says:

    Financial Samuri–I think there’s also a sense that you can’t lose on a house. That may be true traditionally, but this is a very different market than any most have seen in a very long time.

    A lot of homeowners are too young to have participated in the housing market of the early 1980s. That was a bad one too, but of course double digit interest rates were the obvious culprit then. We don’t have that to blame this time around, so this market is harder to figure.

  11. 11
    Financial Samurai Says:

    Kevin – I wrote an article entitled “Property Makes People Think Irrationally” after one of our fellow publishers asked the community whether he should buy this property with “13%” down. I was shocked that someone who writes personal finance couldn’t understand the fallacy of his reasoning, since he has nothing left after the down payment.

    I’m bullish on housing here, and plan to buy another rental.

  12. 12
    Rosa Says:

    Kevin, in the early ’80s, my parents owned THREE houses at once – one they had paid cash for, but which they were still paying taxes and upkeep on, one they had bought when my dad was transferred to a new area for his job, where my mom and infant brother stayed behind to keep having open houses, and one in the new place dad was transferred to after 6 months, where I started elementary school.

    It wasn’t just the high interest rates – companies were re-organizing and shrinking operations like crazy because of the recession and people were having to move for jobs.

    I actually wonder, with people changing jobs so much, and families so scattered, if homeownership really is a good idea for most of us – my partner has pretty specialized skills and if something happened to his company he would have to choose between finding another job in his little niche, or starting over in a slightly different part of his field so we could stay here. And if, God forbid, his parents needed us nearby because they became disabled or ill, one or the other family would have to move to a new state.

  13. 13
    Kevin@OutOfYourRut Says:

    Rosa, that’s a really good point. Long term fixed rate loans became popular in the 30s and 40s as the workforce was unionizing, and it worked well after that as employment become more stable.

    Today, the unionized work force is a fraction of the size it was a few decades ago, the job market is much less stable, and we’re still signing on to 30 year mortgages. Low and no down payments make the risk even deeper.

    It might not be a bad idea to consider the long term stability of your career field, to the degree that anyone can, in determining if buying is really the best option. In much of the country right now, people are having to move to other states to find work in their fields. That’s probably adding to the foreclosure problem.

    These are complicated times, and hopefully we’re all learning a few things from them.

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