If you’ve shopped around for a home recently, you’re probably familiar with feelings of despair, confusion and annoyance. Homes are getting snapped up like PlayStations at Christmas and, if you’re lucky enough to find a house in your budget, you might end up competing with multiple bidders.
Home sales got off to a slow start in 2020 because of the pandemic, but they picked up in July and have been accelerating since, easily lapping 2019 numbers—back when we didn’t have Covid threatening jobs and the economy. With people stuck at home or in tiny apartments in packed cities, it made sense to look for better digs. And it seems like many people had that same idea.
More Home Sales, Higher Prices Help Shut Out First-time Buyers
In November 2019, home sales were up 3.1% year over year. A year later, November 2020, sales outpaced 2019 by 25.8%, according to data from the National Association of Realtors.
“Despite the ongoing economic impact of the pandemic, households seeking more space, assisted by low mortgage rates, drove the demand for new homes higher,” said Joel Kan, associate vice president of economic and industry forecasting at the Mortgage Bankers Association.
This market is particularly treacherous for first-time homebuyers. Without a hefty down payment or a strong credit score, buying a house can be nearly impossible. This leaves priced-out buyers with one option: make a long-term plan.
But all hope is not lost. Here are three things you should do to help land that first house in 2021.
1. Work With a Lender
If you’re completely in the dark about whether you qualify for a mortgage—which is common if you’ve never gone through the mortgage process before—start by talking to a lender or a mortgage consultant.
They’ll often start with basic financial questions about your income and assets, but the real clarity comes when you apply for a loan. “Prequalification tells you roughly how much you can afford based on what you report about your down payment, assets, credit and income, and it can uncover any obstacles you might face when it comes to securing your financing,” says Ryan Dibble, chief operating officer at Flyhomes, a Seattle-based real estate startup.
If your lender or a mortgage consultant pulls your credit report, that will give them even more insight into your creditworthiness. They’ll be able to pinpoint any problem areas in your financial history and advise you on next steps.
“In some cases, the mortgage consultant may have a sufficient credit profile to work with and collect income documents along with assets and issue a preapproval,” says Paul Appleton, head of consumer lending at Union Bank in San Francisco. “In other cases, the mortgage consultant may advise the client to pay off a charge off or bring a delinquent account current prior to re-pulling credit in 90 to 120 days.”
In essence, a good lender can navigate you through the process of getting your finances in order and matching you with a loan that makes sense for your budget and financial goals. The more experience they have, the more programs they’re likely to know about, such as down-payment assistance programs or specialty programs that banks, online lenders and credit unions might offer.
2. Compare Your Goals With Your Financial Potential
It might be frustrating to see friends and family become homeowners while you struggle to make rent. But keep in mind that motivated buyers are often willing to make serious sacrifices for homeownership.
So, what looks like a simple transaction might really be the fruit of years of saving, working extra jobs and living well below their means in order to access homeownership. Or they could have inherited money they used to make a big down payment. Whatever the case, every situation is unique, so don’t compare yourself and don’t be limited by today’s setbacks, especially in today’s tough market.
If you find that you can’t afford a home in your area on your income—either because of bidding wars or lack of inventory—then it’s time to compare and consider different scenarios. Figure out how much more you would need to earn in order to buy a home. Once you have that number, you can move onto step two: increase your income or decrease your spending.
Do you get another job? Cut back on expenses? Ask for a raise? Increase your skill set (and income bracket) by getting a specialized certification or going back to school? Obviously, this isn’t a quick-fix solution, but buying a home can take years, so don’t worry if you need more time.
Some people consider their retirement savings as part of their “financial potential.” After all, $100,000 lying around in a half-forgotten 401(k) account can look an awful lot like the down payment to a dream house. And when homes are scarce, like they are now, it can create pressure to buy at all costs.
But leveraging your retirement to snag a home could be a devastating mistake. Experts roundly agree this is an unwise move that can cost you down the road, so definitely talk with a financial professional before you go down that path.
The bottom line is that you want to create options for yourself—both now and in the future.
3. Move Somewhere Less Expensive
If you want proof that Americans love homeownership, all you have to do is look at the moving trucks. People will move across the country to become homeowners—San Francisco to Austin, Los Angeles to Boise, Manhattan to Montclair.
This might seem extreme, especially if you have a strong network, family ties or a job that requires your presence. But for some motivated buyers, moving is just part of what you have to do if you happen to live in a pricey city.
Steph Baker, a Sacramento-based real estate agent at Dunnigan Realtors, has seen firsthand how skyrocketing home prices have forced people to move. Sacramento is a refuge for techies fleeing the exorbitant cost of Silicon Valley. She describes the current market as “ferocious,” as she recounts how the last house she sold had 18 offers.
“Most of the bidders were investors. It’s completely changed from two years ago,” Baker says. “Back then, if you wanted to buy a house, you could buy a house. Now, it’s not a slam dunk. You’re up against a lot of people, so it just drives up the price.”
Recently, Baker started working with a teacher who is having a hard time finding a home within her budget in Sacramento, so Steph recommended that she look at good school districts outside of the city to expand her options.
“There are nearby areas that are less expensive and have less competition, so it makes sense that she looks in other places,” Baker says.
Home prices are not the only consideration. Income tax, property taxes and cost of living (food and utilities) all play a role in how much you’ll spend on just living in a certain area. So if you have a tight budget, places that offer lower and fewer taxes can be a huge money saver. This is, after all, money that can be put toward a mortgage or down payment.
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