Houses are rocketing in price and demand has been outpacing supply, spurred on by low interest rates and the fear that they will rise significantly through 2022. This is leaving prospective home buyers scrambling to find something affordable. But there are sensible strategies that can help you stay sane and in the game. Here are some courtesy of the Washington Post and Time magazine.
PRO TIP: Start your home search with properties that are under your budget so that you have wiggle room. Starting off at about $25,000 below the asking price for example can give you room to negotiate.
Know what you can afford.
The problem with viewing beautiful homes for sale online or on television, is that it shapes what you want in a home. There’s nothing wrong with aspiration, other than it may currently be unaffordable. Be especially cautious about waiving contingencies to give you an edge. If you waive an appraisal contingency and the appraisal comes in lower than your offer, you could have to pay the difference or risk losing your earnest money deposit.
Start with the four key components of affordability: How much you have saved for a down payment; how much your household earns; what debt you carry; and your credit score. Your credit score will directly affect the interest rate on the loan, which has a multiplier effect on how much you can borrow. Your debt service (how much you pay each month) will be subtracted from the total amount you can spend on your mortgage, taxes and homeowners insurance. Once you have a handle on these four components, it’s time to get preapproved for your loan.
When you get preapproved, your lender agrees in writing to fund your loan, provided the home you choose appraises out in value. Getting preapproved allows you to know precisely how much mortgage you can expect. Once you have this number, you’ll add the amount you have available for a down payment to come up with the approximate purchase price. (Don’t forget to set aside the few months of cash reserves the lender will require.)
One thing to remember―a preapproval is not the same as getting prequalified. A true preapproval letter means a lender has reviewed your credit, undertaken a review of your file and decided it will fund your loan. A prequalification letter is when a lender lets you know that, based on the unverified information the lender has from you, the lender believes you are qualified for a certain loan amount. Some lenders will give you a preapproval letter, but it includes so many qualifications, it really doesn’t amount to a true preapproval.
Decide Your Tradeoffs
Make two lists: everything you want in a home and everything you can’t live without. Building these two lists will help you understand what trade-offs you’re willing to make to get most of what you want. Trading off a parking space for a built in BBQ might seem tempting if you don’t have a car currently – but could be a mistake if you end up needing transport down the road.
Expand Your Search/Approach
If you want to be a home buyer but can’t afford to buy a single-family house in your neighborhood of choice, get creative:
- Expand your search radius to other neighborhoods that might not be optimal but satisfy your basic needs
- Consider buying a two- or three-family unit property, where you live in one unit and rent out the others
- Buy with a partner or friend (be sure to sign a partnership agreement if you’re unmarried)
- Build a multi-generation household to leverage additional income (another growing trend)
- Buy an investment property while you rent to others (perhaps you can move into it later)
- If your job(s) are remote, consider buying a home in a vacation area you frequent
Get smart about the process.
Put together your home-buying team, including an experienced traditional real estate agent or exclusive buyer agent; if you’re buying investment property, add a tax expert and a real estate attorney. Your Credit Union owns its own mortgage company, Community Mortgage Funding (CMF). This means we can offer better rates and service. Check them out for candid advice and your best options.
When residential real estate markets are tilted toward sellers, you’ll need to be as smart as you can to find a home you can love. To that end, be sure to educate yourself and don’t buy on impulse. Read, ask questions and challenge your own assumptions. And remember, the homes you tour probably won’t look as good as the ones you see on TV, so don’t be discouraged. Once you close on a home, you can spend the rest of your life redecorating it to your heart’s content.