Interest rates may be consistently on the rise these days — February marked the 8th increase since March 2022 — but you can still find plenty of opportunity in the current real estate market.
For one thing, home price growth has started to slow nationwide, according to the S&P CoreLogic Case-Shiller Index, which means you could land your dream home for less than you might have expected. The most recent data shows a sixth consecutive month of declining home prices in the U.S., as of December 2022.
Another shift is that homes are receiving fewer offers these days, according to data from the National Association of Realtors (NAR). On average, homes listed in January 2023 are receiving just 2.5 offers, compared with the 3.9 offers they received a year prior. This could mean more room for negotiation than you would have had over the past few years.
To help you navigate the current market conditions, we asked industry pros for their best advice on becoming a more competitive buyer. Here are their top tips.
The first step is to get your finances in shape before applying for a mortgage. Typically, this includes improving your credit score, paying down debts and bolstering savings. It may seem like a tall order, but it's worthwhile because underwriters consider each of these components when reviewing your loan application. Putting forth the strongest financial package possible will increase your chances of getting approved for a home loan and can also help secure the best possible interest rate, which can save you money over the life of the loan.
All of this can better position you for home buying success, so you'll want to keep these tips in mind:
The surest way to improve a credit score is to make payments on time and pay down debt as much as possible. This process takes time, and while there's no immediate way to boost your score, you can try to expedite the process by checking your credit reports for any errors that can be resolved. You may also want to consider asking a friend or family member with good credit if you can become an authorized user on one of their cards. Doing so may raise your available credit and drop your utilization ratio, which is a major factor in determining your overall credit score.
You'll need accessible funds for a down payment and closing costs, but having reserves (your cash assets left over after covering those expenses) is important too; typically, lenders expect buyers to have three to six months' worth of mortgage payments in the bank for reserves after closing.
This is a measure of your total recurring debt divided by your gross monthly income. A good goal is for this ratio to be below 45% because that is the number most lenders look for when reviewing loan applications. If your current ratio is over that benchmark, you can improve it by either paying down debt or increasing your monthly take-home pay.
Your best bet is to connect with a home lending officer three to six months before you're ready to buy, says Zachary Rose, a Citi home lending officer in Laguna Niguel, CA. That way, "you can start having a conversation with them about your down payment, FICO score, DTI, and reserves — all the small details that can throw a wrench in the approval process," he says, instead of having to scramble.
Getting pre-approved for a mortgage is always beneficial because it provides proof that you can afford to buy the seller's property, assuring them your offer is legitimate. It's a must particularly in competitive markets because if you're not pre-approved, other buyers who can provide this reassurance can swoop in and win out. In fact, "a lot of listing agents won't even look at an offer unless it comes with a pre-approval attached," says Rose.
Keep in mind: Most pre-approvals don't come with a lending commitment; they give a rough estimate of what the buyer can afford. Because the final lending decision comes later, after further review, this type of pre-approval can be riskier for both the buyer and seller because the loan application could eventually be denied.
If you're looking for added security, consider an option like the Citi SureStart® Pre-Approval program, which offers a firm loan commitment for approved borrowers. This makes your offer stronger "because you've taken
The pro you choose can directly impact your home buying success, especially in a fluctuating market, so you'll want to find a knowledgeable agent who is responsive and available to answer your questions and is a proven negotiator. Because it's less of a seller's market right now, says Rose, "hiring someone who has the skills to negotiate on price and concessions can be a really big advantage in this environment."
Research options online and ask friends and family for their recommendations, with an emphasis on finding an agent familiar with your area. "Real estate markets are very local, so what's happening nationally may or may not apply," says Stanley D. Longhofer, Ph.D., director of the WSU Center for Real Estate at Wichita State University in Kansas.
"An agent who can help you understand what's going on in your local market is essential," he says. "I can't emphasize the value of that enough. They've seen the types of offers sellers are receiving and they know what types of terms you may need to put to create a competitive offer."
The amount of your offer is important, of course, but there are also other components you can include to make your bid even more attractive to the seller. To start, you can increase the amount you put in escrow, or your good faith deposit on the home. The typical escrow amount is 3% of the home's purchase price, according to NAR, but upping that percentage can show the seller you are serious about buying, says Dr. Longhofer. "Just be sure this is an amount you can afford to lose because, ultimately, if you decide to break the contract and walk away from the home, there's a chance you won't get this money back," he says.
If you can afford it, consider covering the closing costs or absorbing repair costs, if any, too. While you won't want to waive an inspection entirely — it's the only way to get a true picture of the home's condition and the opportunity to walk away if it needs too much work — agreeing to pay a set dollar amount toward repairs can sweeten the deal, Dr. Longhofer says.
Finally, if you're not set on a particular time frame, consider accommodating the seller's requests on the closing and possession dates. Details like these can be the concessions that give you the winning edge.
The content reflects the view of the author of the article and does not necessarily reflect the views of Citi or its employees, and we do not guarantee the accuracy or completeness of the information presented in the article.