Buying a house before selling a house

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winterfan
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Buying a house before selling a house

Post by winterfan » Thu Mar 08, 2018 10:52 am

My husband and I are thinking about either buying a different house in the same general area we live in now. One of my questions is how to finance a new house purchase. Most of our net worth is tied up in retirement accounts. We do have about $150K in taxable savings though. Our current house was paid off a few years ago. We paid $225K and it is worth about $350K or maybe even $375K. It needed extensive rehabbing (mostly DIY) when we bought it, which is why it was relatively inexpensive.

We are looking at houses that cost $475K-550K. The question I have is can we qualify for a mortgage without selling our house right away? We would sell our house eventually, but we would only move if the right house came up. We live in a area with a competitive real estate market and would have to jump on a house right away. I don't think we could do an offer with a contingency of selling our house and win any bidding wars, but I'm not totally sure about that. Would a bank give us a loan for a house this expensive? Do they look at the value of our 401Ks? We make $85K a year and have no debt. Our monthly expenses run about $2400-2800/mo.

If I plug our basic income and down payment (100K) into the online mortgage calculatosr, they show that we qualify for a house worth anywhere from 360K-440K or so. Does that sound right? If so, that's kind of depressing because I think $500K+ is more realistic to get the kind of house we want.

We like our house OK enough, but would we would love a functional 3rd bedroom and a second bathroom. We technically have a three bedroom house, but the third bedroom is tiny (8x10) and cut up with three doorways. We can't really use if for anything practical. I think an addition might cost around 80-100K, but I'm not really sure. We would add a bathroom on the first floor, extend our kitchen a bit and extend the square footage of the upstairs bedroom. Maybe this is a better option than buying a new house, but I'm not thrilled with the idea of all that construction.

bloom2708
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Re: Buying a house before selling a house

Post by bloom2708 » Thu Mar 08, 2018 10:58 am

Many buyers do this. Yes, you would qualify.

$550k house on $85k combined income? Whew.

If you net $350k from your current house and put that down, a $200k mortgage would be fine.

You would sell $110k + fees from taxable to put the 20% down initially?

I would only do it if it would work on one of your salaries. Maybe just look at let the house fever go away? You did all the work, got it just how you want it and now want to sell? Just tossing out some ideas.
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straws46
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Re: Buying a house before selling a house

Post by straws46 » Thu Mar 08, 2018 11:01 am

You should talk to your bank. You should be able to get a bridge or swing loan secured by both your current home and the one you want to purchase. When you sell your current home you convert to a permanent loan after applying some or all of the sale proceeds to the down payment.

straws46
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Re: Buying a house before selling a house

Post by straws46 » Thu Mar 08, 2018 11:08 am

As a follow up, buying before selling can be very stressful. You have two houses to maintain, insure and pay taxes on. The longer that continues the more stressful it can become. Also, if the market is falling in your area you are at greater risk of a financial mistake. Good luck.

winterfan
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Re: Buying a house before selling a house

Post by winterfan » Thu Mar 08, 2018 11:17 am

bloom2708 wrote:
Thu Mar 08, 2018 10:58 am
Many buyers do this. Yes, you would qualify.

$550k house on $85k combined income? Whew.

If you net $350k from your current house and put that down, a $200k mortgage would be fine.

You would sell $110k + fees from taxable to put the 20% down initially?

I would only do it if it would work on one of your salaries. Maybe just look at let the house fever go away? You did all the work, got it just how you want it and now want to sell? Just tossing out some ideas.
Yes, I think we would have to. I'm not thrilled about that either since it's our safety net. I mean I can't complain about our lives right? I think a lot of people would be happy to be in this situation. Our house is about 1500 sq. ft. It's fine for our family of three. I would like another bathroom on the first floor. Our aging relatives have a lot of trouble going up the stairs to use the toilet. I wish there was a place to tuck in a half bath on the first floor, but there isn't.

An ideal house would be about 1800 sq. ft. with 3 bd/2 ba. That should cost around 400-420K, but these rarely come on the market. There are more 500K+ houses available, but these are around 2000-2200 sq. ft, which is bigger than we need, but would be fine. Part of our problem is I don't want to move my child away from her school, so our geographic area is somewhat limited.

Maybe an addition would be a better idea. I think we could get a home equity loan and preserve our savings.

winterfan
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Re: Buying a house before selling a house

Post by winterfan » Thu Mar 08, 2018 11:19 am

straws46 wrote:
Thu Mar 08, 2018 11:08 am
As a follow up, buying before selling can be very stressful. You have two houses to maintain, insure and pay taxes on. The longer that continues the more stressful it can become. Also, if the market is falling in your area you are at greater risk of a financial mistake. Good luck.
Yes, I agree! I don't think we would have any trouble selling, but you never know what could happen.

winterfan
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Re: Buying a house before selling a house

Post by winterfan » Thu Mar 08, 2018 11:21 am

straws46 wrote:
Thu Mar 08, 2018 11:01 am
You should talk to your bank. You should be able to get a bridge or swing loan secured by both your current home and the one you want to purchase. When you sell your current home you convert to a permanent loan after applying some or all of the sale proceeds to the down payment.
Thanks- I wasn't really aware of these types of loans.

ETadvisor
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Re: Buying a house before selling a house

Post by ETadvisor » Thu Mar 08, 2018 11:34 am

If you want to do this consider putting down less than 20% and a lower interest ARM. After sale and receiving sale proceeds eliminate PMI by putting more down. Also determine if want to refinance to fixed conventional loan.

chevca
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Re: Buying a house before selling a house

Post by chevca » Thu Mar 08, 2018 11:48 am

winterfan wrote:
Thu Mar 08, 2018 10:52 am
We are looking at houses that cost $475K-550K. The question I have is can we qualify for a mortgage without selling our house right away? We would sell our house eventually, but we would only move if the right house came up. We live in a area with a competitive real estate market and would have to jump on a house right away. I don't think we could do an offer with a contingency of selling our house and win any bidding wars, but I'm not totally sure about that. Would a bank give us a loan for a house this expensive? Do they look at the value of our 401Ks? We make $85K a year and have no debt. Our monthly expenses run about $2400-2800/mo.

If I plug our basic income and down payment (100K) into the online mortgage calculatosr, they show that we qualify for a house worth anywhere from 360K-440K or so. Does that sound right? If so, that's kind of depressing because I think $500K+ is more realistic to get the kind of house we want.
Yes, I'd say that sounds about right for the future home as you have things. While the bank would look at the 401k balances and the paid off house, those aren't income. They will qualify you on how much you can put down and your income.

If your area is that competitive you would need to jump at a moments notice when you found the right place, you would be better off selling first before the search. Then you can have more to put down and pre-qualify for more house. Of course, if it's that competitive around there, you could lose a few bidding wars before getting a house. And, where does that put you in the meantime... renting, or...?

Maybe just stay put... you do have a paid off house.

barnaclebob
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Re: Buying a house before selling a house

Post by barnaclebob » Thu Mar 08, 2018 11:53 am

The way we did it was to pay a 20% down payment from our taxable investments, get a second mortgage on the new house equivalent to what we thought we would safely net from the old house, and a conventional mortgage for the rest. Not sure if that was optimal but it worked for us.

Another option is to just get a larger conventional mortgage and recast the payments after rolling the old equity into the new house. We didn't do this because it would have put us in Jumbo loan territory with a higher interest rate.

Other products might work better if you don't plan on bringing cash into the new house like we had to in order to make the monthly payments what we wanted. That would avoid capital gains.
Last edited by barnaclebob on Thu Mar 08, 2018 12:03 pm, edited 2 times in total.

BardParker
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Re: Buying a house before selling a house

Post by BardParker » Thu Mar 08, 2018 11:54 am

I would have serious reservations about purchasing a $450k-$500k home on an $85K salary, despite having completely paid off the $350k current home. That decision would have to take into consideration several factors:
1. Whether it's a seller's or buyer's market in your area, with potential repairs that are going to be requested by the purchaser of your current home.
2. Realtor fees and closing costs for the sale.
3. Whether or not the home you purchase is truly "move-in ready", having to account for moving costs and unexpected repairs.
4. Your age, how long you plan to work, and your comfort with a mortgage payment of $900-1300 for the next 15-30 years.

I am more conservative, and generally discount those bank estimates regarding how much house you qualify for. Good luck with your decision!

Nate79
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Re: Buying a house before selling a house

Post by Nate79 » Thu Mar 08, 2018 12:01 pm

Would a bank give you a loan for that amount without selling your house? Maybe but doubtful due to your low income compared to size of mortgage.
Should you buy a house at that cost on your income? Of course you should roll the equity into the new home and even put more down but that is a lot alot alot of house for your income, not matter how much you put down.

Are you maxing out 401k and Roth IRA's? And have money to pay the mortgage payment on top of that?

I would say those online calculators are giving you a hint you are over extending yourself.

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Meg77
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Re: Buying a house before selling a house

Post by Meg77 » Thu Mar 08, 2018 12:11 pm

Hi there, I'm a banker who does a lot of mortgages. Per federal mortgage regulations, your debt to income ratio cannot exceed 43% to get a mortgage. That means that if you earn $85,000, only $36,550 can go toward "debt" each year. HOWEVER, the debt service calculation must include property taxes, home insurance, and any HOA dues as well as the actual mortgage payment. That's on ALL real estate you own, not just the new house. Plus of course car loans, student loans and credit cards are factored into that as well.

The average property tax rate in McHenry County per the internet is 2.7%, which means on a $500,000 home you may pay $14k a year in property taxes. A $400K mortgage at 5% over 30 years will cost you $26K per year. You're already at $40k now, meaning you are going to get declined for that request even if you have no other real estate or debt.

Keep in mind these ratios are based on gross income. Even if you deplete your reserves for the down payment to get into a house, after taxes you'd be spending the substantial majority of your paycheck on your house, particularly once utilities and such are included. That's a recipe for frustration and for working decades longer than otherwise necessary before you can afford to retire.
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ETadvisor
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Re: Buying a house before selling a house

Post by ETadvisor » Thu Mar 08, 2018 12:12 pm

straws46 wrote:
Thu Mar 08, 2018 11:08 am
As a follow up, buying before selling can be very stressful. You have two houses to maintain, insure and pay taxes on. The longer that continues the more stressful it can become. Also, if the market is falling in your area you are at greater risk of a financial mistake. Good luck.
This is true. I did it and was a desperate seller as a result. The surprise was I almost got back all my federal income tax withholding due to the added deductible expenses of the two houses. The new tax laws may have changed this outcome but something to consider.

LiterallyIronic
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Re: Buying a house before selling a house

Post by LiterallyIronic » Thu Mar 08, 2018 12:20 pm

Is it possible that you sell your house, move most of your stuff to a storage unit, and live in a $30/night motel while you buy a new house?

winterfan
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Re: Buying a house before selling a house

Post by winterfan » Thu Mar 08, 2018 12:27 pm

Thanks for all the replies! We do put away about $23-26K a year in retirement a year. It sounds like we won't be able to move realistically, but now I'm kind of warming to the idea of adding on to our house. Right now we pay almost 5K in property taxes. A 500K house will run around 7-8K a year, so that would be something to think about. There have been a lot of big property tax hikes too. Of course, if we add on, our taxes will go up significantly lol.

If we could do it all over again, I think we should have just bought the house we wanted in the first place even if it cost more. 20/20 hindsight I guess.

winterfan
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Re: Buying a house before selling a house

Post by winterfan » Thu Mar 08, 2018 12:28 pm

LiterallyIronic wrote:
Thu Mar 08, 2018 12:20 pm
Is it possible that you sell your house, move most of your stuff to a storage unit, and live in a $30/night motel while you buy a new house?
Yes. We could move in with relatives too. The only problem is the houses that come up are few and far between. There isn't a lot of inventory right now, nor has there been in the last year at least. It might loosen up later maybe.

Robinson871
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Re: Buying a house before selling a house

Post by Robinson871 » Thu Mar 08, 2018 12:36 pm

winterfan wrote:
Thu Mar 08, 2018 10:52 am
My husband and I are thinking about either buying a different house in the same general area we live in now. One of my questions is how to finance a new house purchase. Most of our net worth is tied up in retirement accounts. We do have about $150K in taxable savings though. Our current house was paid off a few years ago. We paid $225K and it is worth about $350K or maybe even $375K. It needed extensive rehabbing (mostly DIY) when we bought it, which is why it was relatively inexpensive.

We are looking at houses that cost $475K-550K. The question I have is can we qualify for a mortgage without selling our house right away? We would sell our house eventually, but we would only move if the right house came up. We live in a area with a competitive real estate market and would have to jump on a house right away. I don't think we could do an offer with a contingency of selling our house and win any bidding wars, but I'm not totally sure about that. Would a bank give us a loan for a house this expensive? Do they look at the value of our 401Ks? We make $85K a year and have no debt. Our monthly expenses run about $2400-2800/mo.

If I plug our basic income and down payment (100K) into the online mortgage calculatosr, they show that we qualify for a house worth anywhere from 360K-440K or so. Does that sound right? If so, that's kind of depressing because I think $500K+ is more realistic to get the kind of house we want.

We like our house OK enough, but would we would love a functional 3rd bedroom and a second bathroom. We technically have a three bedroom house, but the third bedroom is tiny (8x10) and cut up with three doorways. We can't really use if for anything practical. I think an addition might cost around 80-100K, but I'm not really sure. We would add a bathroom on the first floor, extend our kitchen a bit and extend the square footage of the upstairs bedroom. Maybe this is a better option than buying a new house, but I'm not thrilled with the idea of all that construction.
There are a few options you could look at but there is a cost associated with them. There are bridge loans where someone will lend you (short term at pretty high cost) money against the equity so you can purchase the up-leg house. I don't normally recommend this unless it is crazy competitive (super hot sellers market) in your market area.

There are also some lenders that will now bundle this. less expensive than a bridge loan but they count the equity in your current home as an asset. A bit more expensive than a normal loan to get into but rates are comparable.

Lastly you can always write an offer on the up-leg house contingent on selling your current one. This is the least expensive way to do it but if you are in a very competitive market with multiple offers it can be really hard to get the seller of the up leg property to want to ride along with that.

Iliketoridemybike
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Re: Buying a house before selling a house

Post by Iliketoridemybike » Thu Mar 08, 2018 12:37 pm

We built a new home and though we had a "schedule" for its completion, nothing was written in stone. So we put our house on the market. It sold relatively quickly and the new one was at least 6 months from being done. So we found a rental with 2 bedrooms and a basement. We moved all our stuff there and unpacked only what we really needed; kitchen, bedroom stuff, the TV, a couch and a coffee table. Everything else was stacked in boxes in the spare bedroom and basement. We lived like it was dorm room. It was one of the happiest times of our life. You didn't have really any chores to do only laundry. We didn't care what the place looked like, so there was no "decorating." It gave us extra time to breath a bit before setting up the new house. It was also cheaper than making a mortgage, HOA, property tax payment and we didn't have to rent a storage unit. I would do it again. It was almost like a mini vacation.

c1over8
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Re: Buying a house before selling a house

Post by c1over8 » Thu Mar 08, 2018 1:21 pm

Any thoughts on using the same realtor vs. different realtors for buying and selling?

We are looking to do the same thing, buy a house before selling a house. We are buying in a less hot area, selling in an extremely hot area (was extremely hot even in the downturn and has stayed hot), and can easily afford both mortgages in the interim so we want to buy before selling.

We may make some repairs/improvements to our current house before selling. There are several concierge real estate companies in our area that are known for remodeling houses before they are sold. Any thoughts on using such a concierge real estate a company vs. unrelated realtor and contractor? Neither of us are particularly in to design so we need people to say this is exactly what you should do for the remodel.

tsewell10
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Re: Buying a house before selling a house

Post by tsewell10 » Thu Mar 08, 2018 1:34 pm

We were in this situation a few months ago. We had a fairly large home equity line of credit on our old home that we used as part of the downpayment on the new home while we waited for ours to sell. We looked at a bridge loan but it was loaded with fees. The equity line of credit ended up being the best avenue for us. Depending on the amount of equity in your current home this might be an option

Nearly A Moose
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Re: Buying a house before selling a house

Post by Nearly A Moose » Thu Mar 08, 2018 1:57 pm

tsewell10 wrote:
Thu Mar 08, 2018 1:34 pm
We were in this situation a few months ago. We had a fairly large home equity line of credit on our old home that we used as part of the downpayment on the new home while we waited for ours to sell. We looked at a bridge loan but it was loaded with fees. The equity line of credit ended up being the best avenue for us. Depending on the amount of equity in your current home this might be an option
Was just about to suggest this as well. I forget when the cap gains taxes hit under the new tax law (same threshold as previously I think??), but it might be cheaper to pay interest on the HELOC for a few months than to pay taxes on the capital gains you'd be forced to realize by selling the stock. Obviously that increases the amount of debt you're carrying at various points, but it seems you should at least run the numbers.
Pardon typos, I'm probably using my fat thumbs on a tiny phone.

chevca
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Re: Buying a house before selling a house

Post by chevca » Thu Mar 08, 2018 2:28 pm

Isn't a HELOC only going to hinder the OP though?

They're already unlikely to qualify for a home over $500k due to income limitations. Having debt isn't going to help them any.

bloom2708
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Re: Buying a house before selling a house

Post by bloom2708 » Thu Mar 08, 2018 2:37 pm

chevca wrote:
Thu Mar 08, 2018 2:28 pm
Isn't a HELOC only going to hinder the OP though?

They're already unlikely to qualify for a home over $500k due to income limitations. Having debt isn't going to help them any.
I agree.

I would be very surprised If the bank would approve a HELOC for $120k on the current home and a mortgage for $450k+ on the new home on $85k income. That is on top of the current mortgage. I don't see the balance on that but could be missing it. That is a pile of debt.

Even if they somehow did approve it, that doesn't make it a good idea at all.
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StoneBob
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Re: Buying a house before selling a house

Post by StoneBob » Thu Mar 08, 2018 2:40 pm

tsewell10 wrote:
Thu Mar 08, 2018 1:34 pm
We looked at a bridge loan but it was loaded with fees.
My 401K plan allowed loans to be taken out against the balance. I used that for a bridge loan when I bought the new house before the old one sold. Very streamlined and cheaper than anything the banks could offer. This might be an option for the OP. Important to be sure it can be paid off from the proceeds of the sale since carrying it for a long period of time can negatively affect returns in the 401K.

gotester2000
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Re: Buying a house before selling a house

Post by gotester2000 » Thu Mar 08, 2018 2:48 pm

I think the OP will be better served with an addition to existing home - there is no need for the new house and mortgage.

sls239
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Re: Buying a house before selling a house

Post by sls239 » Thu Mar 08, 2018 8:08 pm

Are you looking at the lines for a particular elementary or middle school?

Many districts have a policy that will allow kids to stay in a school for a final year of elementary or middle school as long as you still live in the district as a whole.

jminv
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Re: Buying a house before selling a house

Post by jminv » Thu Mar 08, 2018 8:29 pm

Another poster who is also a banker noted that it would be unlikely that you would be approved for a second mortgage, ie, two houses at once wouldn't work. I'll mention that even if it were possible, keep in mind a potential scenario in which you buy another house at the current market price while your current home is still sitting on the market. Consider what would happen if for some reason, such as a recession, your house continued sitting on the market while you were also paying for your new house. Then this house sold at a lower price than you were expecting.This happened to close relatives of mine during the last recession and it was an incredibly stressful period for them. Their income to debt level was also lower than yours with the two mortgages. The house ended up sitting for about 18 months. Luckily, you'll be able to avoid this situation given your restrictions on getting a second loan.

What I would do if I were you would be to sell my house but try to do a leaseback for a month or two from the buyers while I closed on a second house. That way your can stay in your house which is now sold before the new one is bought. This depends on the buyer's situation and is negotiable. Otherwise, I would find a short term rental.

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Re: Buying a house before selling a house

Post by TropikThunder » Thu Mar 08, 2018 9:01 pm

Meg77 wrote:
Thu Mar 08, 2018 12:11 pm
Hi there, I'm a banker who does a lot of mortgages. Per federal mortgage regulations, your debt to income ratio cannot exceed 43% to get a mortgage. That means that if you earn $85,000, only $36,550 can go toward "debt" each year. HOWEVER, the debt service calculation must include property taxes, home insurance, and any HOA dues as well as the actual mortgage payment. That's on ALL real estate you own, not just the new house. Plus of course car loans, student loans and credit cards are factored into that as well.
Are you currently still a mortgage banker? The reason I ask is that the max DTI for both Fannie Mae and Freddie Mac is not 43%, and hasn't been for over eight months. Both Freddie and Fannie raised it to 50% last July for loans that can be underwritten automatically (by Desktop Underwriter for Fannie or by Loan Prospector by Freddie). Manually underwritten loans for Fannie do have a lower DTI cap but even then it's 45% with sufficient credit score and reserves. Now, your bank may have overlays that require DTI to be less than 43% but that's not the current federal regulation for those two programs, at least.
Maximum DTI Ratios
For manually underwritten loans, Fannie Mae’s maximum total DTI ratio is 36% of the borrower’s stable monthly income. The maximum can be exceeded up to 45% if the borrower meets the credit score and reserve requirements reflected in the Eligibility Matrix.

For loan casefiles underwritten through DU, the maximum allowable DTI ratio is 50%. If the DTI on a loan casefile exceeds 50%, the loan casefile will receive an Ineligible recommendation.
https://www.fanniemae.com/content/guide ... /6/02.html
(I couldn't find the corresponding Loan Prospector guide)

OP, your current expenses make your DTI ~37% (~$2,600/mo expenses vs ~$7,000/mo income). If I read your original post, that's without a current mortgage. This means your allowable housing costs for the new house (PITI + HOA if there is one) can't be more than ~$900/mo without reducing obligations or increasing income.

winterfan
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Re: Buying a house before selling a house

Post by winterfan » Thu Mar 08, 2018 11:24 pm

Thanks to everyone for your thoughtful replies. It's fun to dream, but I think moving up would be a mistake and stressful. I'm warming to the idea of an addition. I think it will be beneficial if we decide to sell down the road and we will enjoy it in the meantime.

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