THIS POST MAY CONTAIN AFFILIATE LINKS. PLEASE SEE MY DISCLOSURES. FOR MORE INFORMATION.
Buying a home is an exciting process. From having a place to call your own to building wealth, first-time and repeat home buyers get excited when they find a home they love.
But the home-buying process is also complex. From knowing what kind of house you want to understanding your budget and navigating the sales contract, there’s no shortage of potential pitfalls.
Add in the fierce competition of the current housing market, and it should not be surprising that 72% of recent home buyers have regrets about their purchase.
With some planning, you can avoid becoming one of the many who regret their home purchase.
Whether you are a first-time homebuyer nervous about going through the process alone to an experienced homeowner ready for your next purchase, there are vital tips for anyone looking to buy their dream homes on terms they can afford.
The Evolving Housing Market
The housing market has been red hot the last few years, primarily due to factors surrounding the pandemic. When enacting lockdowns, the supply chain became disrupted, slowing the building of new homes.
Add in low interest rates fueling people to purchase homes, and the supply-demand curve quickly shifted in favor of home sellers.
The result was countless stories of “properties going up on Friday and sold over asking price by Monday. Buyers being very aggressive with their offers, waiving inspections, and covering any appraisal gaps”, says Lori Salmon of Berkshire Hathaway HomeServices Fox & Roach.
A recent survey from Anytime Estimate American Home Buyer shows 80% of homebuyers made more than one offer, with 41% making five or more. Of those who were successful in having their offer accepted, 31% paid over the asking price, with the median amount over asking being $65,000.
When the Federal Reserve began to raise interest rates, mortgage rates rose from 3% in early 2022 to over 6% by year-end. The rate increase on a $250,000 loan increased the monthly payment by almost $450. But these rate increases have had little impact on the housing market.
Today, the housing market is still hot, mainly due to a supply shortage, as home builders still have not returned to the pace of building before the Great Recession. There is also high demand, as institutional buyers are buying residential real estate to rent, and individuals are still looking to move or buy their first home.
Salmon says, “the market is still very competitive. One house a client of mine put an offer in for had 17 offers. Our offer was accepted but we went $60,000 over asking price and waived the inspection. Another house I was helping a buyer with had 15 offers. Inventory is still low. In Montgomery County, PA, new listings in January were less than the previous two January’s.”
Ensuring You Get a Good Deal
Since market dynamics still favor home sellers, buyers must prepare before looking at houses. For starters, ensure your credit report is error-free, and your credit score is as high as possible, so you increase the odds of approval and get the lowest interest rate possible.
Getting pre-approved is highly recommended, too, as some listing agents will only show houses to those with pre-approval letters.
Another critical step is to know how much house you can afford. The traditional industry measurement is the principal, and the interest portion of your mortgage should be at most 28% of your monthly gross income and no more than 36% of your total debt.
But don’t forget other home expenses like homeowners insurance and home maintenance when factoring the true cost of a house.
Getting this ratio right can be challenging, with higher mortgage rates compared to a year ago and home prices continuing to increase.
40% of would-be homeowners put down less than or equal to 20%. But there are drawbacks to this strategy, mainly a higher monthly payment along with additional costs like private mortgage insurance.
Your best option is to sacrifice in the short term to save as much as possible for your down payment. You could take on a side hustle or two to help fund your down payment.
You also want to avoid compromising on certain aspects of the home. Knocking down a wall, painting a room, replacing flooring, or other cosmetic improvements are easily done.
But you can’t move a house out of a bad neighborhood or cheaply change the entire structure of the house. The survey found that 80% of home buyers compromised on their priorities, with 20% settling for a home in a worse location than where they were looking.
You want to avoid buying a home you cannot afford at all costs. Doing so will increase stress as you try to pay your monthly bills and still put food on the table. As difficult as it might be to remain patient until you find the right house, doing so will lessen the chances of regret.
Sometimes, you can do everything advised and still not be able to find a home to buy.
While you can wait, hoping to find the right deal, another option is to get creative. One outside-the-box idea gaining popularity is the BRRRR method, which stands for buy, rehab, rent, refinance, repeat. There is no set time to rent the property, so you could delay the rent, refinance, and repeat part of the equation until you feel ready.
Alternatively, buying a duplex is an option as well. Here, you would live in one half of the home and rent out the other half. The advantage to this is the rental income would help cover a portion of your monthly mortgage cost.
When you move out to a single-family home, you could keep the duplex, rent out both units, and have the rent payments cover your entire mortgage payment.
Finally, there is always the option of purchasing a tiny house. These small homes are much more affordable and have a lower environmental impact. In some cases, they even provide mobility when built on a trailer.
No matter what direction you go, once you own the home, it is recommended you pay off your mortgage early by making extra payments. Doing this will save you thousands of dollars in interest, and you can use the extra money each month to increase your savings.
I have over 15 years experience in the financial services industry and 20 years investing in the stock market. I have both my undergrad and graduate degrees in Finance, and am FINRA Series 65 licensed and have a Certificate in Financial Planning.
Visit my About Me page to learn more about me and why I am your trusted personal finance expert.