The durability of the now two-year-old housing boom has upended just about everything about the process for buyers and sellers.
Despite consistently dwindling inventory and rapidly accelerating mortgage rates, the time houses spend on the market is close to historic lows. The average is 47 days – but there are markets where the list/open house/offer timeline can be less than a week.¹
How can a buyer find an edge? Here are a few things to think about.
Set Realistic Expectations
The market is changing quickly, so you need to be clear about what you can afford.
- Closing costs – 2-5% of the home’s value
- Down payment – 20% standard means you don’t have to pay private mortgage insurance
- Credit score – this will impact your mortgage rate
- Taxes – will you include these in your mortgage amount?
The big unknown here is the value of the home. It’s not uncommon to see houses go for tens or hundreds of thousands of dollars above listing price. You need to thoroughly research your target area and understand what homes are selling for. The guidance of a real estate agent is critical here, but you’ll want to do your research, too.
Make Yourself Competitive
What used to be a rarity – the all-cash deal – is becoming more common in this market. If you’re not able to Venmo the home’s owner, at minimum, you need to get mortgage pre-approval. Taking the next step of a pre-underwritten loan may also be a good idea. Pre-approval is not a guarantee that you’ll get a mortgage. Pre-underwriting means that the mortgage company has evaluated your financials and committed to writing a mortgage up to a specified amount.
Mortgage lenders generally want to see the past two years of income and work history, and if you receive W-2 income, you’ll most likely need to provide recent pay stubs and W-2 documents. Self-employed individuals must jump through a few more hoops. In addition to work history, you’ll most likely have to submit tax returns and other documents to verify and confirm income as lenders view self-employed workers as more risky borrowers (even though this may not be true).
On top of your income and employment status, lenders will want to know your debt-to-income (DTI) ratio. This allows them to see how much of your current income is going towards debt to determine how much additional debt they feel you can handle while still being able to pay them back. The DTI calculation is relatively simple as it takes your monthly income and divides it by your monthly debt payments. So, if you earn $15,000/month and pay $5,000 towards debt, your DTI ratio would be 33%. A typical number lenders look for borrowers to stay under is 40-45%.
Another strategy to use in addition to pre-underwriting is taking advantage of a rate lock. Given that interest rates are rising, a rate lock can guarantee your rate for a set period, generally 30-60 days. However, there is a tradeoff as this strategy can get expensive if you don’t find a home within the specified timeframe and request an extension. The fees are generally a percentage of the total loan amount.
Time Is of the Essence
Online listing services are either the greatest thing the internet ever served up, or an open door into a descent into madness and frustration. You’ll likely have both reactions at some point. Keep in mind: You need to see the house, neighborhood, parks and playgrounds, schools, and shops in person. Pictures, digital walk-throughs, etc. can’t tell the whole story. You’ll get familiar with your target neighborhoods quickly, but you need to see every house you’re thinking of offering.
You want to do this as soon as the listing goes up as possible – the first weekend the house is open to prospective buyers if possible.
Think Through Your Must-Have/Live-With Risk Profile
From the seller’s perspective, if they can get an offer with no contingencies, it’s more attractive than the same amount of money – or maybe even more money – because the likelihood of it going through is higher. So as a buyer, you may want to think about giving two of the protections that are usually built-in to the deal.
- Home Inspection: This protects you against something seriously wrong with the house that isn’t reflected in the price. Forgoing this means you could have hidden costs and pay much more than the selling price.
- Appraisal Contingency: If you give up this contingency that allows you to back out of the deal, and the home appraisal comes in lower than your bid, you’ll have to make up the difference in cash. Your lender will write a mortgage for the appraised value. Appraisals are based on previous similar sales, and in this skyrocketing market, the data lag can be detrimental.
For a buyer, it’s a frustrating time to enter the housing market. Given the likelihood that interest rates will continue to rise and inventories will not increase dramatically anytime soon, you’ll need to be strategic, prepared, and fast-moving. Do your research, set your expectations, and get your ducks in order.
¹Hale, Danielle. Weekly Housing Trends View. March 24, 2022. Realtor.
The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax or financial advice. Please consult a legal, tax or financial professional for information specific to your individual situation.
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