Buying a home in an extremely competitive market, like the current housing market, can feel overwhelming. Historically low mortgage rates are motivating people to buy before rates go back up, and a housing shortage is driving up prices and competition. According to the National Association of REALTORS® (NAR), the number of homes on the market in May decreased by 20.6% when compared with May 2020. It can be tough to navigate this intense seller’s market and there are many homebuying mistakes to be made in the rush to buy. Here are five and how to avoid them.
1. Skipping the home inspection
Many homebuyers are skipping home inspections in order to sweeten their offer to sellers, given that repairs can break a deal. This is risky because inspections can protect you from expensive, unknown problems. According to Forbes.com, home inspections are “such a pivotal point that many home purchase agreements include a contingency that lets buyers dissolve the purchase agreement if major issues are found during the inspection.”
There are ways to potentially hedge your bets. One tip NerdWallet suggests is conducting an “informational inspection,” meaning your inspection will be informational only and you won’t request repairs. Another strategy, discussed in our blog “6 Ways to Win a Bidding War,” is to bring a home inspector with you to showings to conduct a “walk-and-talk inspection.” These inspections don’t result in a formal report, and important issues can remain hidden.
Beware that lenders also typically have minimum condition requirements properties must meet. If a house doesn’t, your mortgage may not be approved. If you’d still like the option to ask for repairs, experts suggest focusing on major problems that pose a threat to your health and safety, like structural issues or mold.
Discuss the pros and cons of dropping any contingency with your real estate agent. Skipping them could hurt you in the long run.
2. Misunderstanding your budget
Knowing your budget is the first step in successfully buying a home in a tight market. A great way to establish this is to get a pre-approval or verified approval letter from your mortgage lender. This requires the lender to verify your income and assets, providing certainty for how big a mortgage you can be approved for. But this isn’t all you’ll need to plan for. Budget for other expenses such as water and power bills and HOA fees to avoid homebuying mistakes stemming from unplanned costs. A good rule of thumb is to spend 28% or less of your monthly income on housing costs, according to Business Insider.
It’s also not uncommon to need a little more than expected due to a bidding war. Possible solutions include exploring ways to increase your budget through low down payment mortgage options or shopping for homes below budget so you can negotiate higher if needed.
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3. Working with an inexperienced real estate agent
Working with an inexperienced agent can be a homebuying mistake if you don’t get the help needed to make important decisions. Real estate agents can have different specialties and it’s important to do your research and find the agent that is experienced in your location, desired property type, and budget. Be sure to interview multiple agents to find the best agent for you, and don’t be afraid to negotiate their commission.
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4. Waiting too long to make an offer
In today’s hot market, don’t be surprised if at least one other buyer is interested in the property you’re considering. According to NAR, the typical U.S. home took approximately 17 days to go from listing to a contract in May 2021, almost 10 days less than that of a year ago. That said, you may need to make an offer quickly. Having your finances lined up is key to putting in a competitive offer the same day, if you need to.
5. Offering too much
Given the competitive market, many homebuyers are resorting to offering significantly more than the asking price on a house. Whether this is to win a bidding war or “wow” the seller into accepting before one starts, they could create problems. One of the dangers of offering too much money is a low appraisal. If the home doesn’t appraise high enough, you’ll have to find a way to pay for the difference between your loan amount and the extra cost.
In order to avoid this homebuying mistake, consult with your real estate agent to get a market analysis of the area. A market analysis is created by looking at recently sold comparable homes and can shed light on how much you should offer.
Although a market analysis is similar to an appraisal, it is not done by a certified professional and cannot promise the same results as an appraisal.
Navigating a competitive market can be overwhelming, but it’s important to take time to carefully consider your situation to avoid making big mistakes.
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