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3 Tips for Smart Homebuying in History’s Most Competitive Market
If you recall your Economics 101 class in college, it simply boiled down to supply and demand dynamics in every single industry scenario. Low supply paired with high demand equals high prices.
Then there’s the Economics 101 lesson exemplified by the current housing market, both locally across Massachusetts, as well as the entire country. It’s more of a School of Hard Knocks lesson on when the supply/demand curve goes nuclear. Extremely scarce levels of home supply paired with a buying frenzy of demand equals not only sky-high home prices, but escalating bidding wars that would make a fine art auction house blush.
But as an MTA member, you can certainly fare better than other home buyers if you’re armed with some insider market knowledge from MTA Benefits’ mortgage lender partner, Mid-Island Mortgage. Here are three simple tips to become a uniquely successful buyer in this high-wire act of a market.
Tip #1 – Waive the appraisal contingency
In normal market conditions, embedded within your home purchase real estate contract is the appraisal contingency. This language protects you if the lender appraisal of the to-be-bought home comes in lower than the agreed-upon price. Historically, the appraised value amounts to more than the purchase price. The appraisal is then used by the lender to determine the home’s value. That value provides the basis for your approved loan amount. It also ensures for the lender that the value of the house is enough to cover the lender’s lost investment in the case of owner default.
Previously, in the rare scenario where the appraisal came in less than the purchase price, the appraisal contingency allowed buyers to walk away, have their purchase contract terminated and recoup their earnest money that was used to go to contract. But in today’s market, with home prices still climbing seemingly exponentially higher and higher, appraisal values are not keeping up. But sales are continuing because there is always another bidder willing to go to the next level and confidently waive the appraisal contingency.
Currently, this is a commonly used tactic for buyers when trying to outbid others and may be advised by your real estate attorney. But buyers should be aware of the math at play here and plan accordingly.
For example, let’s say buyers agree to a $500,000 purchase price and intend on putting down 20% ($100,000) to avoid paying mortgage insurance with their monthly mortgage. However, the house only appraises for $450,000. Now that 20% down payment is effectively reduced to 10% and a few hundred dollars in mortgage insurance is tacked on to their monthly mortgage payment until they reach closer to 20% equity.
This is a normal scenario in today’s competitive market seen by Mid-Island Mortgage, but it helps to know what may transpire beforehand.
Tip #2 – Be ultra-organized & ready to pounce
There’s nothing wrong with shopping around for houses and it will certainly take a little while for you to get a feel for what’s available and what the going sales prices are when walking through each property. But because houses are often emerging onto the market and going under contract in, sometimes, a matter of days, it’s best to prepare with your lender ahead of time on the following:
- A pre-approval from your lender that will let you know how much you can afford in monthly payment, what your maximum loan amount can be and what your theoretical purchase price can be. Plus, during this COVID-19 era, selling agents won’t let you in a house without a pre-approval.
- The towns/school districts in which you are willing to purchase
- The maximum property taxes you are willing to pay
- The absolute must-haves in the house. But don’t be picky! After all, a fixer-upper is often an even better option with flexible all-in-one purchase/renovation mortgages available now. You can more easily afford a house and design it the way you want even before moving in.
- A realtor that knows the markets you’re searching within and might have an inside track on new listings. Lenders can often refer you to the most experienced and trustworthy of realtors. You want one that’s also a good negotiator with contacts in the real estate market. Zillow.com can also provide you info on realtors’ transaction history.
- The knowledge and confidence to know when to bid with a strong offer!
Tip #3 – Get qualified for the most mortgage you can afford
Lenders evaluate three elements in qualifying you for a mortgage and the lowest interest rate you can get: your credit score, amount of down payment and debt-to-income ratio. Mid-Island Mortgage is flexible when evaluating all your qualification measures, but we also want to position you in the best light possible with sellers, who, above all, want to make sure you can close.
For example, while MTA members’ salaries and work history are typically straightforward, you may have a self-employed spouse. In this case, you will need proper two-year documentation of his or her work history and income. Rest assured, a good lender will go the extra mile in discovering your true qualifications and income.
Another example is using rental income to qualify. During Covid, many landlords weren’t collecting rent payments. We will work with you to show how much rental income you earned based on tax returns.
Most importantly of all, your lender will go to bat for you with a seller, vouching for your buying power and qualifications. We speak to selling agents every day, assuring them of the buyers’ mortgage approval and purchasing power. And just because another bidder is putting down 50% and you are putting down 5%, doesn’t mean you are not the better buyer for the seller. You might have an extremely low debt-to-income ratio based on other compensating factors like your income and we will strongly present that to the seller.
There are many other keys to success in today’s housing market, including best practices on which mortgage product or structure is right for you and how you can speed up the mortgage process through a little document organization. For more mortgage advice or if you have any other questions, please give Mid-Island Mortgage, with our regional office in Woburn, a call at 617.665.7770 or email us at firstname.lastname@example.org. MTA members receive more than $3,000 in waived closing cost and fee discounts. Learn more at: https://mortgagecorp.com/mta.