How to buy a home in a competitive housing market
With the 2020 health crisis tapering off in the U.S., you might think the nation's housing markets would be set to cool down and return to normal. So far, though, that hasn't happened. Instead, housing markets have remained red-hot this year.
The competitive housing market has made it more difficult for potential buyers; and it’s simply an issue of supply and demand - there are more people who want to purchase a home than there are homes available for sale.
That mismatch creates what's known as a sellers' market. Many owners receive multiple bids, oftentimes for more than their asking price, and homes sell very quickly. Securing a home may be difficult for buyers who aren't prepared to succeed in this type of market.
So what's the best approach to buying a home in a competitive market? The answer may differ from buyer to buyer, but there are certain tried-and-true strategies that may work for you.
Six tips to help you find — and buy — the home you want.
1. Get pre-qualified for your mortgage.
Most buyers need financing to purchase a home. If you're in that group, getting pre-qualified for your mortgage can be a crucial first step.
Mortgage pre-qualification empowers you to make smart decisions about your home-buying budget. You'll know how much you may qualify to borrow, how much you may be able to spend, and how much your monthly payment could be based on your income, down payment, and credit score.
To get pre-qualified for your mortgage, you'll need to provide your W-2s, paystubs, bank statements, and some form of identification, such as a driver's license. The specific list of documents will depend on your personal financial situation and your lender's requirements.
Once you’ve been pre-qualified, get a pre-qualification letter. Most sellers won't even consider an offer without a pre-qualification letter unless it's an all-cash deal.
If you're not able to get pre-qualified right now, the process can help you find out what you need to do to qualify. For example, you may need to increase your down payment or try to improve your credit score.
2. Ask about special mortgage programs.
Whether you're a first-time home buyer or just a little short of cash for your down payment or closing costs, you may be able to qualify for a special mortgage program that could help.
These programs help buyers purchase a home even if they have less income, a smaller or no down payment, or other challenging circumstances.
Government-backed home loans, closing cost assistance programs, and low-down-payment mortgages are just some of the types of programs that are available. Your mortgage professional can help you find out if you qualify.
3. List your needs and wants.
"Needs" are non-negotiable features you must have in your next home. "Wants" are features you'd like to have but would be willing to compromise on. For example, you may need three bedrooms, a home office, or a backyard for your dog. You may prefer a two-car garage, air-conditioning, or hardwood floors, but those extras may not necessarily be deal-breakers.
Making a list of your needs can help you decide whether a home that's for sale meets your minimum requirements. If it does, you may be willing to sacrifice some of your wants to make an offer for that home. If it doesn't have what you need, you can move on to the next house. By knowing your non-negotiable items, you’ll be able to act faster in today’s competitive environment
4. Stay in touch with your Realtor and Loan Officer.
Realtors stay on top of new listings so they can show them to their buyers.
A "showing" may mean an open house, private tour, or digital tour of the home's interior and exterior. Digital tours can include photos, videos, and even 3D images. You can also drive by the home and look at the neighborhood, street, and exterior of the property.
When your realtor sends you a new listing, try to look at it as soon as possible so you can make an offer if it meets your needs.
Staying connected to your loan officer allows you to ask any financing questions you may have throughout the process so that your prepared for any scenario and will allow you to act quickly when you're ready to move forward.
5. Make a strong offer.
When you buy a home, there are several ways to write your offer so that it’s stronger than other offers the seller may receive.
Strategies include offering a higher price, making a bigger down payment, letting the seller choose the closing date, and limiting the number of contingencies you request.
Contingencies are requirements that must be met before the sale closes. Examples include a home inspection, appraisal, approval of financing, insurance, and the sale of the buyer's home.
Shortening the timeframes for your contingencies to be met may also strengthen your offer.
Your Realtor may suggest that you write a "love letter" telling the seller why the home is perfect for you. This strategy could strengthen your offer, or it could raise concerns.
Whatever strategies you use, try to put your best possible offer on the table. In a competitive housing market, sellers will disregard offers that they don't perceive as serious, especially when they receive multiple offers.
6. Stay focused on your goal.
A hot market could mean that you “lose” a few homes you like to other buyers. In a competitive market that's a normal part of the process.
If your first offer isn't accepted, try not to become discouraged. Talk with your realtor and mortgage professional about what you can do differently next time and how you can strengthen your offer. Consider modifying your list of needs and wants to open up your housing choices. Be patient and continue to make offers until you're able to buy a home that you love.