Category: Personal Finance

In November of 2012, the house next door to my parents went up for sale and my wife and I were instantly intrigued. We joked around about buying it at first, but we had just bought a second car and decided we probably wouldn’t be able to talk ourselves into it before the house ended up selling anyway. Well, about four months have passed and the price of the house had dropped a bit over that time. My wife brought it up again, and we decided to entertain the idea, at least. Then once we did a little research and financial math, we made an offer on the home and we’re currently a little more than a week away from taking possession of the home.

First, to address the whole “living next to Mom and Dad” thing. Doesn’t bother me at all, and the entire thing was my wife’s idea, so she’s okay with it as well. Other than the selfish reasons such as easier child-care for our future children and more of Mom’s home-cooked food, I’m just happy to have the opportunity to be close to Mom and Dad. They might not live next door forever – Dad might retire in five or ten years and the folks might pack up and head off somewhere else.  In the meantime, we’ll enjoy this opportunity to be close.

As I said, I had to do a bit of research on home-buying. I’ve bought a home before, but buying your first home compared to your second home is a completely different beast. There’s trying to figure out how much house you can afford, how much a bank will loan you, and of course what to do with the house you’re living in right now.

Sell First, Then Buy? Or Buy First, Then Sell?

Since I bought first, that’s really mostly what I’ll be talking about here. In reality, you should almost always sell your current home first and then buy. That wasn’t an option for me, because there was a specific house my wife and I wanted, and if we didn’t get this house, we weren’t going to move at all. We were/are quite happy with our current living arrangement.

The obvious benefit to selling first is that you avoid having to pay two mortgages at the same time. You do run the risk of being temporarily homeless if you need to close on the sale of your current home before you’ve closed on a new home, but most people find that preferable to the whole double-mortgage issue. A nice storage unit could be had for $100/month or less and you and your family could certainly find some temporary living digs either with a family member or, at worst, a motel.

Buying First: Pre-Approval from a Lender

So I wasn’t able to talk you out of getting yourself into this mess. You found your dream home and you want to make an offer on it. First, you need to obtain a Pre-Approval Letter from a lender. For most home-buyers, this would be no big deal. Not for you, my friend. Since you haven’t sold your first home, the payments you make on your current mortgage actually count against you when they calculate what’s called a “Back-end Ratio,” which is essentially all of your debt payments added together and divided by your gross income. This percentage needs to be no higher than 36%. This is where most people who are attempting a “buy before sell” transaction will hit a road block.  Essentially, the bank has to qualify you for an amount greater than the two mortgages put together (exe: you own a $100,000 home and want to buy a $200,000 home. You would have to qualify for a $300,000 loan based on your income and debts).

Buying First: Reserve Requirements

Reserve requirements are something new since the last time I bought a home. In mortgage lending terms, “reserve” is an amount of cash the lender requires you to have on hand before they’ll close your loan. I’ve heard of buyers having a reserve requirement even when they sold their current home before buying a new one, but it seems to be more often required for folks who will at least temporarily have two mortgages.

The reserve that I was required to have was six months worth of mortgage payments on both mortgages. Your 401k balance actually contributes to this reserve if you don’t have the cash on hand, with the assumption being that you’d tap into your 401k before you’d allow yourself to lose your house.

Did I Mention about Paying Two Mortgages?

Paying two mortgages is going to be stressful no matter what your situation. At the end of the day, you’re paying money for a house you’re no longer living in. Even if you can squeeze it into your budget, it’s still a losing situation. In my case, I’ll be paying about $700/month for a house I’m not living in. About $100/month of that will be adding to my principle and I’ll get it back. The rest is pretty much going into a black hole. Oh, and there will be some residual utility bills for the old place as well (they like to turn the lights on when they’re showing a house for some reason).

How long will your old home be on the market before sale? It’s hard to tell. You might get lucky and sell it in a couple months, or it could take a year. I saw a condo for sale in my city today that has been on the market for about 14 months. Thankfully, most of them (and especially the ones in my area) seem to be selling within 3-4 months max. We’re crossing our fingers!

It’s not all bad…

For fear that this entry will come off too negatively, there are (of course) benefits to buying prior to selling. Obviously, you avoid the whole temporary homelessness thing. And actually, we anticipate moving into our new place will be a lot simpler. We’re taking possession on a Monday, so we’ve figured that we’ll just truck our boxes to the new place throughout the week after work and then rent a Uhaul to get the rest over the weekend. There are really no deadlines, since we’ll completely own both places. Heck, we don’t even have to move all the stuff out of our old place right away anyway. So it does make for a less stressful moving day.

When it’s all said and done, though, you accept the consequences when you want something badly enough. Money will certainly be tight for a little while as we’re paying two mortgages/utilities/etc, but we’ve done the math and it is doable. And as long as it’s doable, we’ve decided that this is worth doing.

For many folks, this is an extremely stressful time of year. Beyond all the family gatherings (which can be stressful in an of itself), there’s the financial burden associated with all the gift-buying that takes place. We’re tasked with taking our normal monthly budgets and doubling or tripling them in order to accommodate all the gifts. Every family approaches this in a different way, with some charging the gifts to a credit card and paying it off over the next year, some cutting their monthly budgets in November and December to help absorb the increase in spending, some folks get artsy and hand-make a lot of their gifts to save money, etc.

I’d like to share what I do to make the holidays less stressful financially : I have a dedicated “Gift Savings” account. Okay, so this is not a genius solution, but it is one that I find effective. My rationale is that I’ve got to pay for gifts throughout the year one way or the other. Whether I charge them to a credit card or absorb them in my budget, the end result is that I have pay for them somehow. I just find it easier to set aside 1/12 of my annual gift cost each month than to find that money in my budgets for November and December, and it’s certainly just as easy as charging it to a credit card and paying it off the next year. If you’re interested, here’s my approach:

Step #1: Calculate Your Annual Gift Expense

For the first year, it might be easier just to sit down and think of a reasonable “gift budget” for all the people you have to buy for and add it all up to come up with a total. Why stop at Christmas, though? Add birthdays, Mother’s Day, Father’s Day, Easter, and any other gift occasion to your list. For the purposes of this article, let’s just say you came up with $1,200 total.

Step #2: Create a Savings Account Outside your Traditional Bank

Create your savings account, but don’t use the same bank where you keep your checking account. It’s too easy to dip into those funds with a simple instant transfer. I use E*Trade for my purposes, but any other bank will do as long as it takes you a few days to get access to this money.

Step #3: Set Up an Automatic Transfer

We calculated $1,200 on gifts, so we would set up an automatic transfer of $100 per month going into our savings account. Be sure to set the date of the transfer strategically so as not to interfere with any other large monthly bills (such as your mortgage). With any luck, you’ll hardly even notice when this transfer goes through!

Step #4: Buy Gifts, then Pay Yourself Back

How you approach this is up to you. During Christmas time, I have a spreadsheet with the names of all the people I have to buy for, the “budget” I’ve set for them, and a list of the items I’ve bought and their prices. I’ll make the purchases, and then about once per week I’ll make a transfer from my gift savings to my checking account for the amount of the purchases. Alternatively, you could just transfer the entire amount that you think you’ll spend to your checking account in advance.

Step #5: Reevaluate Annually

This is where it helps to keep track of what the actual spending was. There have been a couple years where I’ve over-saved and I come out of the Christmas season with a few hundred dollars left in the gift savings account. The fun part about that is that I can just carry that over to the next year, and I’ll set aside a little bit less money per month. Say you saved $1,200 but only spend $1,000 throughout the year. Now you’ve got $200 in your account and you know you only really need $1,000. In that case, you only need to save $800 next year, or about $70 per month.

I don’t mean to peg this as some sort of superior approach. As I said, every family handles it differently and every family has reasons for how they handle it the way they do. If you find the holidays financially stressful, however, this is one alternative that might be worth considering. I really enjoy doing it this way because I hardly notice the monthly transfers going out, and when Christmas comes around I’ve got everything I planned to spend in its own dedicated account. It allows me to enjoy the holidays just a bit more, without being so wound up about the dollars and pennies.

Happy Holidays!