Purchasing my first home in 2006 was an exciting and surprisingly simple ordeal. I went to my bank, got approved for a loan, and then put in an offer on a small condo for about $75,000. While Mrs. Caveman and I were living there, we never put a whole lot of thought into what our next home purchase would be like. We were enjoying the low mortgage cost we were incurring while building equity and saving money. We had no kids, and no imminent plan for them, so we were perfectly happy where we were.
In March of 2013, our world got rocked. The house next door to my parents was for sale, and coincidentally we had just started talking about possibly having kids in the near future. After talking it over together, and talking with my parents, we decided to give the Realtor a call. Since the house had been on the market all winter long and the owners had long-since moved out of the state, not only were they eager to sell, but they needed to sell quickly.
We made a pretty low offer on the house, trying to take advantage of their eagerness to sell. Unfortunately, the offer was lower than the owners could accept because they would be losing money on the house. They responded with an offer that was slightly higher, along with some financial calculations showing us that this offer would still cause them a net loss on the house after Realtor fees. Further, they said that if we could not accept this offer, they were going to have to explore the possibility of simply renting out the house.
At this point, the wife and I were faced with a major dilemma. Not only was our current home not even on the market yet, but it was at least a month away from even being ready! We had made some significant upgrades to the home the previous summer, but there were a few odds and ends that had yet to be finished. If we were really sure about this house, we would have to accept the seller’s counter-offer and move forward with the purchase of this house before selling our current one.
Major Complication #1: You Have to Qualify for BOTH Mortgages
My first question when going through the pre-approval process with the bank was this: since I have not yet sold my home, does this hurt my chances of being approved for the new mortgage? The simple answer is YES. Since the bank has no assurance regarding if or when my current home would be sold, my annual earnings have to be enough to qualify me for both mortgages. Since my new home was $200,000 and my condo mortgage had about a $70,000 balance, that meant that I had to qualify for $270,000! Yikes!
Thankfully, my wife and I would have qualified for as much as about $450,000 (which sounds nuts to me, but that’s what the calculation said) so this ended up being a fairly uneventful process.
Major Complication #2: You Might End up Having to PAY Both Mortgages For a While
The next issue is simple: how long was it going to take to sell our current home, and how long could we afford to pay both mortgages? Not only that, but there would certainly be some residual utility bills that would be needed for maintenance of our current home throughout the sale process.
To figure this out, I made a spreadsheet in Microsoft Excel with a full list of bills for both our current home and our new home’s bills. I figured out how much the new mortgage would be, and called the utility companies to find out how much the utilities had been costing at the new house (you can actually do this, by the way). Lo and behold, we had enough excess income to pay all the bills without digging into our emergency savings, but it would be really tight. Definitely no saving was going to be happening while we were paying bills for two houses.
How the Story Ends
Well, about a month after I got pre-approved, we were moving our stuff into our new house. Being significantly bigger than our condo, it was a bit amusing to see how empty some parts of the house looked!
As luck would have it, our condo sold and closed just a few days before the first mortgage payment on our new house was due. So technically, we never actually had to make two mortgage payments in the same month. Unfortunately, our desire to sell the condo as quickly as possible led us to probably give up more on the sale than we would have liked. I would say the offer we accepted was probably about $5,000 less than we would have taken if we weren’t in this situation, but we knew if the buyer walked away, it might take us six months (or about $4,500 in mortgage payments on the condo) before we got another offer.
Moral of the Story: It is obviously preferable to sell your current home before you purchase a new one, but sometimes that’s not an option. Just be aware of the challenges associated with qualifying for the additional mortgage and the potential reality that you may have to pay both mortgages for a period of time before you can sell your current home.
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