We’re beginning to turn a corner in the housing market. Interest rates are coming down as the economy moves closer to a recession, and this is already starting to make housing more affordable for millions of Americans.
However, this is change in affordability is starting to create new problems…
We’ve already started seeing reports that home prices are on the rise. That pace of appreciation is only going to accelerate as more home buyers enter the market. Not only that, but the increased competition is going to result in a switch back to a full-blown seller’s market – all but destroying home buyers’ ability to negotiate on things like price, closing timelines, and seller concessions.
We’re already starting to see this play out. One of the real estate agents our team works with, who is one of the top agents in the St. Louis, MO area, told us that out of the 67 purchase offers she made on behalf of her buyers in the first quarter of 2023, 64 of them had multiple offers!
If you were in the housing market at all in 2021, you know just what this feels like. Lower interest rates, high buyer demand, and low home supply led to a skyrocketing of homes prices and bidding wars that made offering asking price nearly impossible. Bidding wars were taking place on nearly all homes, and these wars were often won by the buyer who had the most cash to sweeten the deal.
The reality is, if you are going to be taking out a mortgage to purchase a home in 2023, you need to find ways to compete with these cash buyers and make your offer as attractive as possible to sellers.
How to Bulletproof Your Home Offer in 2023
1. Execute a Comprehensive Upfront Market Analysis
You want to be comfortable and confident when making the big decision to purchase a home. A large part of this is understanding the state of the housing market and what causes home prices, interest rates, and buyer demand to change.
Increasing home prices and heavy competition can be intimidating and disheartening. This can lead to you abandoning or postponing your home search, losing out on appreciation and finding yourself paying even more down the road. But if you understand why the housing market is changing and what it will look like in the future, you will be more confident in making your real estate investment.
A lender who will help you bulletproof your home offer will educate you on the important factors and market changes that are affecting affordability and home prices, including:
- Why interest rates are where they are now, and what will cause them to move higher or lower in the future
- What is happening in the economy that could affect home demand and supply (i.e. a recession)
- What is causing home prices to change in your area
To be able to leverage all the details you need to make a confident and smart decision in a real estate transaction, knowledge on the current state of the housing market is a must. You want to feel comfortable and confident when you decide to make an offer on a new home. When you have your initial consultation with your mortgage advisor, they should carefully guide you through the data and help you understand WHY the market is moving the way it is.
2. Prepare an Appraisal Gap Strategy
In a real estate market with low inventory and high demand, prices go up and offers above asking price become more common.
While this is great news for sellers, it can be tricky to navigate as a buyer if the price you offered in your contract ends up being lower than the appraised value of the home. This is called an appraisal gap, and they tend to happen often in a hot real estate market.
Appraisers use historical sale data to determine home value – typically going back as far as six months to find comparable homes in the area. The problem with this strategy is that the price of the home the seller sets is based on the current estimated value…and there can be a gap between the current value and the ‘comparables’ that the appraiser has chosen over the previous six months. That gap can result in the appraised value being lower than the current value the seller is willing to sell for.
This is a problem for buyers who need mortgage financing, because lenders won’t loan more than the home’s appraised value. If the appraised value comes in below the contract price, there is going to be an even bigger gap between the amount of loan you can secure and the amount you need to pay.
This is why preparing for an Appraisal Gap strategy with your lender upfront is so important. Doing this will make sure you can still make the numbers work and be able to buy your home if the appraisal comes in a little bit low.
For example, let’s say you are purchasing a home listed for $800,000 and putting 20% down ($160,000). However, the home only appraises for 10% less than the listed price at just $720,000.
Without an Appraisal Gap strategy in place, you would be faced with having to pay an additional $64,000 out of pocket that you had not planned for (the difference between the new down payment amount and the appraisal gap). This is no small number, and for most home buyers it would mean the end of the deal.
However, if you had planned for this with your lender beforehand, you would have options and be able to move quickly to save the deal. In this scenario, your lender could restructure your purchase contract from a 20% down payment to a 10% down payment. This means the 10% that was going to be used as a down payment can now be used to cover the appraisal gap.
Appraisal gaps are becoming more common as home appreciation continues to rise and competition for housing intensifies. However, a low appraisal does not have to end in a canceled deal – it just means you have to pivot and renegotiate.
3. Obtain a Fully Underwritten Pre-Approval
According to an analysis by Attom, a reputable property data provider, more than 36% of all single-family home and condo purchases in 2022 were all-cash deals. This is an increase from about 23% in 2020.
One of the main reasons that all-cash offers are so attractive to home sellers is because they do not come with any financing contingencies. When you are taking out a mortgage to buy a home, there will be a financing contingency date in your offer that says if you cannot obtain the necessary financing before that date, you can back out of the contract without any repercussions. This protects you as the buyer, but makes the offer less attractive to the seller when compared to an all-cash offer without this contingency.
As a buyer who needs a mortgage in a highly competitive market like today, you need to do everything you can to make your offer as attractive as possible to the seller. This means going beyond a normal mortgage pre-approval and instead obtaining a fully underwritten credit-and income-approval.
A fully underwritten pre-approval means that a mortgage underwriter has reviewed all the necessary income and credit documentation BEFORE you are pre-approved. Yes, this may be more work on your part as you will need to pre-prepare all of your bank statements, paystubs, and asset documentation and have your mortgage credit report run. However, once an underwriter has reviewed your loan package you will have the ability to close much faster because you have been underwritten and approved.
This way, as long as you can find a home and submit an offer while the pre-approval is valid (usually 60 days), your financing does not have to be reviewed again before your loan is submitted for processing. This means your loan processing can move faster, and you even have the possibility of removing the financing contingency completely and offer a earlier closing date should the seller require it.
4. Use a Bridge Loan to Eliminate Further Financing Delays
In a fast paced and high-priced market, it can be difficult to buy and sell a home at the same time. Many homebuyers do not have enough extra money lying around to afford a large down payment on a new home while still paying for their current mortgage, feeding their family, and affording all their other day-to-day expenses. But if you have equity in your current home, you might qualify for what’s known as a bridge loan.
In a competitive market like the one we’re currently in, a bridge loan opens up doors for those who have a significant amount of money tied up in their home equity. A bridge loan helps you “bridge the gap” when transitioning from one home to another by providing short-term financing by tapping into your home’s existing equity, giving you immediate access to as much as 80% of your home’s value.
This means that if you’re in the process of selling your current home, you don’t have to wait until it sells to buy the next one. Bridge loans can give you a much-needed edge in a competitive housing market, offering increased buying power regardless of when you sell your existing property.
Just like the previous tips for creating a bulletproof home offer, a bridge loan strategy is so crucial because it allows you to remove yet another contingency from your offer. Usually, you would need to include a sales contingency in your contract, meaning you’d only complete the purchase of the new home when your current home sells. A bridge loan helps you avoid this contingency, making it easier to work with sellers and may help you stand out from other buyers.
In today’s market, you need to be better prepared than all the other buyers out there – especially those who have a lot of cash. However, there is no need for you to be intimidated by the competition in the housing market. By employing these tips you can find a home you love, create a winning offer strategy, and start building wealth through homeownership.
We would love to be in your corner during your home buying process, whether that’s by educating you on the current market or getting you a fully underwritten pre-approval so you can shop with confidence. If you are ready to start the process or would like to learn more about how we are helping homebuyers win in today’s market, fill out the form below to request a consultation with a NEO Home Loans mortgage advisor.