How a mortgage nerd bought a house in a seller’s market
I closed on my house about eight months ago, but I feel like it was in another lifetime. Yes, the COVID-19 pandemic makes time strangely elastic, but also, the housing market has undergone dramatic changes during this time. As a writer focused on mortgages and homeownership, it’s my job to monitor this stuff, and what I saw in 2021 were legitimate bananas.
If you’re having a hard time finding a home you can afford or trying (and failing) to get an offer accepted, I just mean – be indulgent with yourself. It’s not you. It is really difficult.
For those of us who aren’t already rolling in the money, it might take some big sacrifices to afford a home: sacrifices like taking extra work while living on a Spartan budget, breaking a “rule. »Financial like borrowing from retirement funds, pooling resources to create a multi-family or multi-generational household, moving from a high-cost part of the country to a low-cost part, or any combination of the above – plus all of them the things I have done.
This is how I bought a house. It wasn’t glamorous, and most of it wasn’t fun, but it’s the kind of moves people determined to become homeowners make in this market. And if you’re unable to follow suit (or just don’t want to), don’t worry – there’s no shame in continuing to praise and strengthen your financial health in the meantime.
I moved in with my mother
Is moving with a parent when you’ve been living independently for years the coolest move? No. Was it smart for me? Yes, and I am more than grateful to have had this support; I realize that not everyone does. Working remotely from my childhood bedroom allowed me to spend the money I spent on rent. And, hey, because I moved in the summer of 2019, when COVID hit, I was way ahead of the homecoming curve.
The National Association of Realtors found that from July 2019 to June 2020, about 4% of all homebuyers reported moving in with family or friends to save money on buying a home. This number is around 7% for first-time home buyers.
Kristen and Robert Toth Jr. weren’t newbies, but they chose to move in with Robert’s mom soon after they listed their starting home in Allentown, Pa. In October 2019. That way they did. would have a bit of a break before buying again. and would be able to increase their down payment. They ended up staying for 10 months, anxiously watching properties being blindly bought for tens of thousands of dollars above the asking price when Pennsylvania closed last spring.
“There was no way for us to leave our old house and move into an apartment, pay rent and afford that house,” Kristen says of their three-bedroom ranch, 1950s, in the suburb of Lehigh Valley. “If we hadn’t lived with a parent, we don’t know what we would have gotten.”
Kristen and Robert Toth Jr. closed their Pennsylvania home in October 2020 (Photo courtesy of Kristen Toth)
I made a 20% deposit
Same, Kristen, Same – there was no way I could have 20% deposit without cutting an expense as important as rent. Even if I had managed to pay off my car and my student loans, without drastically reducing my monthly expenses, it would have taken me years to save for a down payment.
In the first quarter of 2021, the median selling price of an existing home was $ 319,200, according to the NAR. You would need to skip nearly six years of café au lait to make a 3% down payment (the minimum down payment for a conventional loan) on a home at that price. Assuming a $ 4.50 cup of java, that equates to 2,128 lattes – and that doesn’t even include the other upfront expenses involved in buying a home, like paying closing costs or paying for it. hiring of movers.
Another problem? While it is easier to pay the minimum deposit into your bank account and, with mortgage interest rate at historic lows, allows you to borrow more money at a lower cost, which can be a handicap in a hot market. This is especially true now, with home prices sometimes exceeding appraisals and sellers concerned about a mortgaged buyer’s ability to cover a valuation gap.
“When you evaluate offers as a seller and you get a rate of 3.5% [Federal Housing Administration loan] and a conventional 20%, if they are both equal and they both try to achieve a valuation of $ 350,000, you would naturally choose the one with the higher down payment because you know they will be able to bridge that gap, ”says Mike Ferrante, real estate agent at Century 21 Homestar in Cleveland.
In other words, since the 20% buyer has more cash on hand, a seller might assume that they could use some of those funds to cover a valuation gap and just make a lower down payment. . A valuation gap occurs when a home’s appraised value is less than what you offered.
Lenders will not allow you to borrow more than the value of a home. So if you want to continue despite a low valuation, you have to be able to make up the difference in cash. (Or the seller has to cut the price, which probably won’t happen in a very hot market.) Buyers who plan to deposit 20% are better placed to transfer some of that money to cover a valuation gap, everything respecting the minimum. payment requirements. This may be one of the reasons why in March 2021, 29% of first-time home buyers put in 20% or more, according to NAR data.
I got mortgage pre-approval
When I was ready to stop just scrolling through real estate listings and seeing properties, I looked for lenders and ended up asking mortgage pre-approval with about half a dozen. Full Disclosure: Not sure if I would have thought of doing this, or even comparing lenders, if I hadn’t written about mortgages for a living.
As I searched for homes in Spring 2020, my local real estate market was hot, but sellers were also wary of too many strangers browsing their homes. Many sellers have asked buyers to show proof of financing before allowing them to visit homes in person.
A year later, it’s less about coronavirus issues than sellers anticipating multiple offers over the sale price. “We won’t even remove people if they don’t have prequalification or pre-approval; you won’t be accepted if you don’t have an offer in hand, ”says Brent Landels, agent for Re / Max Key Properties, which is based in central Oregon. Landels advises looking at homes that are listed below your pre-approval amount, as this gives you the opportunity to bid higher.
The author closed her home in September 2020 (Photo courtesy of Kate Wood)
I bought a fixer
I walked through over 20 homes in person and scrolled through who knows how many more online. Finally, in September 2020, I closed a 1740s Cape Cod-style home in eastern Connecticut that needed a lot of love (you read that right, it’s almost 300 years old). It had a lot of period charm, a large lot with lots of mature trees, but if he had been ready to move in I doubt I could have afforded it.
This low initial sticker price may come at a cost, which Monica Lee and her partner Dan Hart also found for the repairman they bought just outside of Washington, DC “We Found a Home in Takoma Park which was ridiculously cheap, but it was unlivable, ”says Lee. In August 2020, the couple bought the house, which Lee said had been unoccupied for about 10 years, with a FHA 203 (k) loan covering the cost of the mortgage as well as their renovation project.
The logistics of their loan turned out to be more difficult than expected. “I worked for the government, I get permissions, I thought I was going there with my eyes wide open and I could get things done,” Lee said. Red tape and contractors’ security concerns have pushed the couple’s timeline again and again, but Lee says, “You learn a lot. You feel like you’ve accomplished something. I’ll feel like we love it. the House.”
Be patient with yourself and the market
Buying a home in a sellers market has certainly meant more work (and money) than I expected. I ended up staying with my mom for months after it closed while I put the house back into place to live. But I’m starting to like my house too.
If you can hang in there, make the sacrifices this market demands, and end up with a place of your own, congratulations. And if you choose to give up your home search for now, I can’t say I blame you.
Yes, you’ll have to keep renting longer, but you’ll also have more time to save for a down payment and maybe adjust your credit score, which can help you get a better interest rate. The market might even become a bit more buyer-friendly. There is still plenty of time to become a homeowner – and if now isn’t the right time for you, that’s okay.
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Kate Wood writes for NerdWallet. Email: [email protected]
The article How a Mortgage Nerd Bought a Home in a Seller’s Market originally appeared on NerdWallet.
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