Home buying in 2023 can be intimidating but it’s not impossible.
It’s no secret that the housing market experiences its ups and downs in general, but the valleys and the peaks seemed to be at their most pronounced as the world navigated the COVID pandemic.
Homebuyers were able to refinance their homes for much lower rates, some dropping from four percent to below three percent. These lower rates were driving up the competition for homes. Bidding wars were common. It was a seller’s market.
Then, interest rates for homes started breaking the six and seven percent threshold. One might pay $220,000 for a home that would have listed at $180,000 just five years ago.
Moving is a reality that many will face in 2023, despite interest rates and market volatility. Katie Thomas, a Realtor for Crye-Leike in Flowood, Mississippi, said that 2023 can still be the right time to buy despite what may be intimidating interest rates.
“I have been a Realtor in Mississippi since August 2005, and I’ve seen these market transitions like this many times. The interest rates go up, and they come back down,” said Thomas.
If you’ve purchased a home at a higher interest rate, you are able to refinance when rates drop in as little as six months or a year, depending on the type of home loan and lender suggestions, Thomas added.
Housing market in transition
In the last year or so, there has been what is known as a “seller’s market.” The COVID pandemic meant less people were moving, so the housing inventory went down. This reality drove prices up. In a seller’s market, a home buyer may find themselves in a bidding war over their dream home, paying well over asking price, forgoing asking for repairs, and even footing the bill for the closing costs.
However, there are signs that the market is shifting back to be more balanced.
“We still have low inventory, but they’re staying on the market longer as we come out of that seller’s market,” said Thomas.
The more time a house spends on the market, the more likely a seller is willing to negotiate in order to close the deal.
Here are signs that the market is becoming more balanced:
● Instead of paying over the listed price, a homebuyer may be able to pay right at asking
or less than asking price.
● List price is closer to what the buyer will pay. In a seller’s market, if the appraisal is less
than the asking price, a buyer might offer to pay up to a percentage over the appraisal.
● General negotiations may be more advantageous to the buyer, meaning closing costs may be
split or covered, repairs could made or money for repairs could be provided, and the like.
In the seller’s market, a buyer may offer to forgo a home inspection, or if a home inspection is performed, they may not ask for repairs. However, forgoing a home inspection is typically not recommended.
“You need as much information as you can possibly get so that you can make the best decision for yourself and your family,” Thomas said. “That’s what you can get when you’re working with an experienced Realtor.”
Another sign that the market tides are changing can be seen in the MLS (Multiple Listing Service) listings. MLS shows that houses are staying on the market longer, which causes an inventory increase of roughly 25% from November 2022.
Preparation is key
Strategy alone will not get you into a home, no matter what type of market you are facing. Before your real estate agent can even help you narrow down the list, you will need to speak to a mortgage lender for pre-approval.
Pre-approval means the bank has approved a maximum amount that they would lend you for the home loan before you have found a certain house. This gives you a budget or price range for home shopping.
“We review information provided to calculate a debt-to-income ratio for a recommendation on how much loan a borrower could qualify for,” said Sandra Cagle, Senior Vice President of Mortgage Lender at Community Bank. “Debt-to-income is calculated based on the proposed house payment and all other debt in relation to the gross monthly income.”
“Mortgage financing can be stressful if you are not clear on options,” said Cagle. “The best way to eliminate this is to be prepared.”
The first step to getting prepared is to know your credit score, and if necessary, what needs to be done in order to improve it. This is information you can get from your free credit report. Many credit card accounts come with credit reports at no additional costs, and you can also check your credit score weekly through a variety of online portals.
If your credit score is low, you may need some more time before you can start the house search in order to pay down a portion of your outstanding debts.
Before beginning your house hunt, it is also important to confirm that you would be comfortable with what your mortgage expense may be. Cagle suggested making a “practice payment” every month for the amount of what you would be comfortable paying for a mortgage.
“(To practice,) pay yourself by putting the amount into a savings account and do not touch it,” said Cagle.
Other personal finance tips include knowing your budget so that you can live within your means and having a reserve fund on hand for the loan approval. As for the amount you would need in reserve for your home loan, that will vary.
“That is entirely up to the type of loan,” said Cagle. “It is best to talk to your lender about the amount you’d need.”
Mortgage financing and interest rates are based on risks which entail loan to value and credit score which can affect your interest rate. Reducing the risk on your loan will lead to better options on interest rate and financing options. The lower the risk the better the interest rate.
Home buying in 2023 – intimidating but not impossible
“While rates are higher now than a year ago, creative options are now more than ever considered,” said Cagle. “Adjustable-Rate Mortgages, Buydowns, and First-time home buyer options help with qualification, however, the most important advice is to be comfortable with the monthly payment.”
In a nutshell, do not become house poor trying to keep up with the Joneses.
“With higher interest, you may have to pay more down to get the payment down,” Thomas said. “You’ll have to be more strategic. You might not buy as big or as new, but you can buy and stay around that comfortable payment.”