Whether you’re a first-time homebuyer or planning to buy your next property in one of California’s highest-priced metro areas, you’re likely all too familiar with the hallmarks of a seller’s market: fast-moving inventory in short supply, rising home prices, multiple buyers vying for the same property and even competition from all-cash offers. For those of us who’ve lived all or most of our adult lives in one of California’s expensive urban hubs, this is the norm we may have come to expect.
At the same time, interest rates are as low as they are likely to be for the foreseeable future and new mortgage programs now offer qualified buyers the ability to get into a home with less money down. A growing acceptance of remote work also means a wider range of options for those willing to relocate. In addition, speculation about a post-pandemic gradual rise in available homes for sale may even prove accurate, with a June 17, 2021 Zillow Market Pulse reporting that inventory levels actually increased in May, 2021.
For new or seasoned homebuyers who know how to deftly navigate current market conditions, summer 2021 presents a wealth of opportunities. Start with these strategies to greatly increase the odds of getting the home you want at a price you can afford:
Work with a great agent that has local expertise
In addition to solid industry experience and a reputation for honesty and integrity, you’ll be well served to insist on a real estate agent with deep knowledge of the specific community where you want to buy. Although you can buy a home through the listing agent, it’s a major advantage to work with someone who both represent your interests, and has a steady finger on the pulse of market trends in the area.
An effective agent with local knowledge can provide inside information on important factors like neighborhoods, facilities, schools, pricing, zoning rules, sales prices, and how quickly homes are selling. They will also help you craft a competitive offer that best meets your needs, negotiate successfully on your behalf and guide you through the sales process to avoid costly mistakes and delays.
If you’re planning to buy a new home and sell your current one, you may be able to save money using the same agent for both transactions, if that person is up to the task, and is familiar with both areas. According to Kristin McKenna from the Boston and Concord, Massachusetts-based firm, Darrow Wealth Management, the agent may reduce their fees, or provide a credit at closing, if you engage them for both deals. For more insight, check out “Should You Use the Same Real Estate Agent to Buy and Sell a Home?” from Realtor.com.
Get a pre-approval letter before you start house hunting
In a competitive housing market, one of the most critical first steps you can take to increase the chances that your offer will be accepted is to get preapproved for a mortgage before shopping for a home. Unless, of course, you’re prepared to pay in all cash. A pre-approval letter demonstrates that you’re qualified for a home loan for a specified amount (subject to conditions), and is an indication to the seller that you’re a serious buyer.
Sellers and real estate agents are often reluctant to deal with buyers without mortgage preapproval, and in many cases, they’ll refuse to consider a bid from someone without one in favor of those who appear to be safer bets. Mortgage preapproval gives the seller confidence that the transaction will go smoothly, since a lender has already done a fairly thorough investigation into your finances to determine your eligibility for the loan.
The preapproval process will also give you a clear sense of how much home you can afford, so you don’t discover that the homes you thought you could afford are actually outside of your price range. In addition, preapproval accelerates the escrow period of your loan. The ability to offer a quick closing appeals to sellers, who may be more inclined to accept your offer over others for this reason. The process for mortgage pre-approval can typically be done in about 24 hours.
Be aware that it’s quite common to get a home loan with less than 20 percent down nowadays
At one time, a down payment of 20 percent was considered the standard for a 30-year fixed-rate mortgage. However, this is no longer the case, as most homebuyers in the U.S. today aren’t waiting until they’ve acquired this amount to buy a home. This is particularly true in certain markets in California where the average 20 percent down payment equates to hundreds of thousands of dollars. Instead, many homebuyers, especially first-time buyers, are looking to mortgage programs with lower down payment requirements. While a smaller down payment generally means that you’ll spend more money over the life of your mortgage, the ability to put less money down has allowed many people to begin building wealth and equity sooner, and has been a game changer for those who were once priced out of many of the hottest real estate markets.
Some lenders, including The Police Credit Union, will allow you to make a down payment as low as 3.00 percent of a home’s purchase price on a conventional mortgage, if you meet the financial institution’s specific qualifications and underwriting guidelines. Lenders may also allow you to make a down payment with gifted funds from a relative, or a friend with a “clearly defined and documented interest” in you. But it’s important to note that a lender will often require that these funds be “seasoned,” or held in your account for a minimum time period, before they can be used this way.
In most cases, your lender will require you to purchase private mortgage insurance (PMI) if your down payment is less than 20 percent on a conventional loan. PMI is a protection for the lender in case you stop making payments and the home goes into foreclosure. It’s paid in either a lump sum annual payment or added to your mortgage payment each month.
Although prices vary, Freddie Mac reports that PMI premiums average $30 to $70 per month for each $100,000 borrowed. Once your mortgage balance is paid down to 80 percent of the home’s original appraised value, you can request that your PMI be dropped.
Don’t get mired in thinking that you must sell your current property before buying your next home — you may have more options that you think
People often assume it’s imperative to sell their current home before buying a new one, but in some cases, a strict adherence to this approach can actually cause you to miss out on an opportunity to buy the home you want, or to get a great bargain. For instance, you may come across a highly motivated seller who may be anxious to settle a divorce or an estate, must quickly relocate, or needs to free up funds for medical bills, home care or another expense. In another scenario, you may simply have found the house that meets all of your needs, but you’re in a tight housing market and want to move quickly before other offers are made.
Although there can be some challenges involved in a decision to buy before you sell, it can be worthwhile if you’re planning to buy in a highly competitive area with low inventory. And if your current home is in a fast-selling market, it’s a far less risky move. What’s more, buying first can save you from many logistical hassles and the additional costs of moving more than once — such as securing a place to live during the transition, paying movers twice, storage costs, and other fees. Melinda Sineriz examines this topic in “6 Times It’s Actually Smarter to Buy a New Home Before Selling the Old” from Realtor.com.
To be clear, most people will sell their home before they buy their next one because they plan to use the money from the sale to buy a new one. This is the traditional course of action, and it often makes sense in that it can be difficult to afford a new mortgage and closing costs while still making monthly payments on your previous home, even if you are able to put up the cash for the next down payment without using proceeds from a sale.
Strategies for buying a new home before your current one sells:
As Elizabeth Weintraub points out in The Balance, not everyone has the income and debt-to-income ratio to qualify for another home loan, or is comfortable carrying two mortgage payments before their property sells. However, the potential good news is that there may be a number of workable strategies to get the funds you need to buy before selling, if this is a prospect you want to consider, preferably in concert with a financial advisor or an agent or lender you trust. These can range from taking out a bridge loan, home equity loan or home equity line of credit (HELOC), to leasing your home or getting it on a vacation rental site like Airbnb or Vrbo. For a helpful overview of these options, check out “How to Buy a Home if Your Current Home Hasn’t Sold Yet,” from Zillow.
Be generous with earnest money
If you have access to the funds, making a larger initial deposit can allow you to be perceived more favorably as a buyer. Like mortgage preapproval, your earnest money communicates to the seller that you’re motivated to buy, and it also demonstrates goodwill. If you back out of a deal for a reason not covered by a contract contingency, this deposit is usually forfeited to the seller. Generally, earnest money is applied to your loan’s closing costs or to your down payment. For guidelines on how much you may need to budget for earnest money, consult “How to Protect Your Earnest Money Deposit” from The Balance.
Don’t be intimidated because someone else makes an all-cash offer
All-cash offers are attractive to sellers because they involve less risk for the seller, and the contract can close much faster. On average, it takes 43 days for a real estate transaction to close that’s contingent on financing secured through a conventional loan. The escrow period can also be unexpectedly delayed by an appraisal (required by most lenders) or other process, and the buyer could be denied for a mortgage for a variety of reasons such as new debt or a change in a job situation. In addition, if the appraisal comes in below the sales price, the deal could also be delayed, or even cancelled.
On the other hand, as many realtors will tell you, the all-cash offer is rarely the highest one that a buyer receives. If you’re able to offer more money and/or better terms, the seller may accept your offer instead. For instance, you might improve your chances of getting the home you want if you give the seller plenty of time buy a new home and move out through a sale-leaseback arrangement. A lender that affords you a more aggressive escrow period may also be a strong selling point when competing with all-cash offers. Redfin also suggests that you consider waiving certain contingencies, or limiting them, but cautions that this should only be done with the recommendation and guidance of your agent.
Ask the seller what they want
Finally, we leave you with one final tip from real estate investor and personal finance trainer Whitney Hutten. It’s simple, but arguably, also brilliant: Ask the seller what they are looking for in their ideal offer. As she explains on BiggerPockets, you can do this yourself by phone, or ask your agent to make the call. As Hutten asserts, you’ll make an even more favorable impression on the seller if you deliver on what it is they want.
Ready to explore your options when it comes to finding the right mortgage for you? The Police Credit Union provides a wide variety of home loans to fit your budget, lifestyle and financial goals. Our mortgage products feature below market rates, low fees and down payments as low as 3.00 percent for qualified buyers. Many of our first-time homebuyers also appreciate the ability to use gifted funds for their down payment.
The Police Credit Union is also pleased to introduce our new *15/15 Adjustable-Rate Mortgage (ARM). An excellent value, our 15/15 ARM helps homeowners realize significant savings with interest rates lower than those available with the average 30-year fixed mortgage.
If you don’t expect to stay in your home longer than 15 years, or plan to refinance before this time period, the 15/15 ARM is a smart way to make lower monthly mortgage payments, while building equity in your home. Find details on this new offer here!
*15/15 Adjustable Rate Mortgage (ARM), amortized over 30 years and fixed for the first 180 months, adjusting to the 10 Year Constant Maturity Treasury Bill plus a margin (2.75% conforming balance, 3.00% jumbo balance) in the 16th year with a 6.00% adjustment cap. Minimum qualifying credit score of 680 required. Other credit qualifications apply; contact a loan officer for more information.