While the housing market has been cooling off a little as of late, it’s not a great time to be a home buyer. In addition to higher mortgage rates and not enough housing supply to meet demand, buyers also have to contend with real estate investors, who buy houses in cash and often beat out buyers who have to rely on financing with a mortgage.
Investors bought a record 18.4% of homes sold in the U.S. during the fourth quarter of 2021, according to Redfin. This number is up 12.6% from just a year earlier. Needless to say, wannabe home buyers have to do a bit more legwork to compete for what houses are available. I’m hoping to become a homeowner again myself in the next few years, and if I end up facing the same kind of market, I’ll be going into it with eyes wide open, and with the following tips in my back pocket.
This is the place I’m in right now. If you’re intending to buy in the near future, it pays to set yourself up for success by paying down your debts, increasing your income if possible, and getting your financial house (ha!) in order. Paying down debt and getting a firmer handle on your finances will likely also result in a higher credit score, which will in turn make it easier for you to qualify for a mortgage when you decide to buy a house.
You should also be saving for a robust down payment. In fact, 20% down is recommended, because that way you’ll avoid having to pay private mortgage insurance on a conventional loan (which is one of the pillars of this plan to beat investors, as I’ll discuss further below).
When the time is right, you’ll need to shop around with a few mortgage lenders to see what kind of rate and mortgage you can qualify for. Government-backed mortgages (such as FHA loans, which are guaranteed by the Department of Housing and Urban Development) have lower down payment and credit score requirements (and sometimes don’t require a down payment at all), but they may make you a less attractive buyer to a home seller. Why? Appraisal requirements.
The FHA home appraisal has stringent livability requirements. For example, you will not be able to buy a home with a broken furnace using an FHA loan. Conventional mortgages also require appraisals, but this is done to ensure the home’s value, not its livability. Consequently, if a seller has a lot of offers on their fixer-upper property with “good bones,” and some of them are from buyers using conventional loans, the seller is likely to prioritize those buyers because there will be fewer hoops to jump through.
Once you’ve picked the right mortgage lender and loan type for you, it’s time to get pre-approved. There are two levels of examination your finances can undergo on the way to buying a home: prequalification and pre-approval. A prequalification requires only basic information and is very quick and informal.
A mortgage pre-approval, on the other hand, is more in-depth and will require real financial data, such as a hard credit check, bank statements, and pay stubs. The resulting pre-approval is the next best thing to either a final mortgage approval or a cash offer. It shows sellers you are a serious buyer.
The next link in the chain to compete with real estate investors is to modify your inspection contingency in the course of making an offer. Your real estate agent (and yes, it’s an excellent idea to hire one; they are your advocate and expert in the home-buying process) can help with this in your offer paperwork. It’s a terrible idea to waive this contingency altogether; you don’t want to buy a house with major problems. But you can agree not to cancel the sale if a problem comes up in the inspection that is under a certain dollar amount, like $10,000 or $20,000. This will reassure the seller you’re committed and won’t try to back out or renegotiate if the inspection doesn’t come back perfect.
This is the final tip in this list, because I realize that few people have the kind of money saved up required to buy a house without a mortgage. And even if you did, it might not be a smart idea for your finances; you may not want to tie up all your money in a large purchase that would be difficult to sell in a hurry if you had a financial emergency. But if you are toe to toe with a real estate investor and can also pay cash for your dream house, that would definitely make you a contender.
It’s a tough time to aspire to homeownership. But these ideas can help set you apart from the rest of the non-investor home-buying pack. Happy house hunting!
This article was written by Ashley Maready from The Motley Fool and was legally licensed through the Industry Dive Content Marketplace. Please direct all licensing questions to firstname.lastname@example.org.