Can you handle 2 mortgages?
If you buy a house before selling your current one, you may be stuck with two loans. Here's how to cope.
But for some people, owning a second home is the American nightmare. Paying for two mortgages doesn't always happen on purpose. You might inherit a deceased parent's house, which still carries mortgage payments. You could get a job in another city and have trouble selling your house while paying rent in the new city — which isn't a two-mortgage payment problem, but if the rent is substantial, it's close enough. Or you might talk yourself into taking on two mortgages, believing it'll only be for a short time.
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That's the scenario Wendy Schuchart, a freelance journalist in Green Bay, Wis., has found herself in. When she and her husband closed on their new house in August, they thought they would carry two mortgages for only a brief period. But their old house didn't sell in the fall, and selling a home during the winter is never easy.
"I'm really, really hoping it sells this spring," Schuchart says.
Lenders do everything they can to make sure you don't wind up in the position of paying two mortgages at once if you can't afford it. Even so, "this scenario is not uncommon, and although nobody really wants to be in that position, sometimes it's unavoidable," says Bill Golden, an Atlanta real estate agent with RE/MAX.
Peter Grabel, a mortgage-loan originator at Luxury Mortgage in Stamford, Conn., says he agrees: "First-time homebuyers do not have to worry about this problem, but people who already own a home and want to move are always faced with a timing dilemma: If I sell my home before I buy, I could be homeless. But if I buy before I sell, I could be stuck paying two mortgages."
The problem, according to Grabel, is that "regardless of what your contract says, you cannot always control the date of a sale."
Plenty of obstacles could delay a closing. "Snow, snow and more snow. The buyer could die. There could be a house fire, or title issues — the deck that was added doesn't have a permit. You could have a hurricane," he says.
But in most cases, if you don't have the money to pay for two mortgages, you won't wind up with two mortgages. As Grabel says, you may sell one home and not have a place to live, which can be extremely inconvenient, but at least you'll have the money to rent while you look for a new house.
In Schuchart's case, she lost her job as the editor of a technology website the day after putting down earnest money on their new house.
"I canceled the offer on the new house and called the bank to tell them not to proceed with the mortgage," Schuchart says.
The lender, however, ran the numbers again and found that "even without selling our house and with my stable income, we could still handle the second mortgage," Schuchart says.
Schuchart and her husband talked it over and decided to go for it. Her husband, an analyst at an information technology company, was in the hospital weeks earlier for a hiatal hernia, a life-threatening condition. By comparison, paying two mortgages didn't seem like a big risk. But now, seven months in, the couple has had to make cutbacks.
They've canceled their cable, and they rarely eat out.
"We used to have a cleaning service," Schuchart says. "Now I'm the cleaning service."
If you end up paying two mortgages, you have two options.
Try to sell the old house, fast. "You need to price your home aggressively and unemotionally, just like a bank would if they owned it," says Brian Koss, executive vice president of Mortgage Network, a private mortgage banking company in Danvers, Mass. "You should ask multiple Realtors for a comparative market analysis of your home so you can see what the worst-case scenario is for what your home will sell for and in what period of time. For example, if the Realtors suggest prices that range between $350,000 and $395,000, you might consider a $345,000 price, which would ensure the shortest marketing time and the hope of a bidding war."
The good news, Golden says, is that if you live in a city where demand is strong, you'll probably sell your house quickly. But he warns against pricing your home too high.
"Just because homes are selling quickly, that doesn't mean that you can ask an above-market-value price," he says.
Rent the old house. Becoming a landlord may not be ideal, but you may decide it's the best of some bad options. Just make sure to price the rent "to cover the mortgage and any homeowners association [fees] and real estate taxes," says Kinnaird Fox, director of development at Fenwick Keats Real Estate, based in New York City.
Whatever you do, Fox says to make sure you don't fall behind on either mortgage payment.
"The last thing you'd want to do is stop payments and go into default," she says, adding that you could jeopardize your credit and chances of refinancing.
Because if the thought of paying for two houses with three bedrooms and two baths sounds unpleasant, imagine how you’ll feel if your credit score winds up in the basement.
More from U.S. News & World Report
- A step-by-step guide to homebuying
- Before you buy, try that mortgage on for size
- 7 homebuying mistakes to avoid
a home owner is someone that has no debts on his house.