If you are just trying to get into the housing market, you may find that your down payment fund is not going as far as you imagined. Record-breaking increases in home prices mean that the savings targets you have set, for example 20 percent of your expected home purchase price, may no longer be undercut.
Here’s what you need to know about the housing market and what your options are to go ahead.
Why home prices are likely to rise faster than your down payment savings
It depends on a few factors: A limited supply of apartments and a large number of motivated buyers are putting pressure on real estate prices. Low mortgage rates mean most buyers can afford to borrow more than they otherwise would, adding to the pressure and inflation driving up the cost of buying just about anything across the board.
Sellers are happy, but buyers (apart from the low mortgage rates) can find it difficult to navigate.
“The past year has been brutal, especially for first-time home buyers,” said Matt Woods, co-founder and CEO of SOLD.com.
Most experts agree that the pandemic has created a difficult market for buyers, but there are signs that things are finally cooling off. In any case, this almost straight upward trend in home prices seems pretty unsustainable.
“I think of my four children, how will my four children ever be homeowners when this is the puzzle they are up against?” Wald says.
What To Do If Your Down Payment Savings Are Not Keeping Up
There are essentially three ways you can react when your dream home – or even a barely adequate home – is out of reach.
1. Wait for the home sales market, increase your deposit
Probably the easiest option – since it is essentially passive – is to simply wait for the market to cool down further. That way, you can increase your savings, and you may even find that house prices in your area are falling a little, which means your money is continuing to flow.
Keep in mind that there are no absolute guarantees with real estate as market conditions are constantly changing, but if you can’t afford to buy now, it’s probably not a good time to dive in.
“The most important thing at the beginning is to decide whether it is the right decision to buy a house now,” says Robert Heck, Vice President of Morty at Morty. “If you have flexibility and time, the possibilities there are a little more widespread.”
Focus your affordability calculations on your monthly expenses, not necessarily the total sales price, he says.
Bankrate’s “How Much House Can I Afford?” Calculator can help you get started.
“This phase of home appreciation is fading,” added Woods. If you want to wait, you can use the time to invest money in more profitable – and admittedly riskier – funds to grow your savings faster.
“Putting money under the mattress won’t help,” he says. “If you park it in the safest place, you can rest assured that it will not help and that it will not grow. If you take advantage of the investment opportunities that are out there, the market is friendly. “
With the investment market so hot right now, some riskier options may even allow you to grow your savings quickly. But let’s get it clear that money you need in one to three years’ time isn’t suitable for riskier investments. However, if you can take a higher risk, consider investing some of your down payment money in the following:
— Stocks that are arguably the most traditional investment vehicle that can generate high returns quickly if you buy the right ones at the right time.
– Cryptocurrency that is having a moment in the investment space. Keep in mind that the crypto valuations have been a roller coaster ride so you could grow your savings significantly or lose your shirt.
You should speak to your financial advisor about your investment options. Other short-term, high-yielding products may be available, but you should decide with someone who really knows your situation.
2. Change your start list for home searches
Another option is to change your apartment wish list. Everyone wants the best possible house in the nicest and most convenient area they can afford, but if you can be a little more flexible about where exactly you want to land, you can get a home faster and cheaper.
“The American dream is so great that I must now own my home forever,” says Woods. “My advice is starter houses are great and maybe you have to be as humble as you can swallow to get into the game.”
If you are comfortable with a starter home, or if you agree to look in a larger geographic area, you will have more options and you can look for places where your savings will do a little better.
“I try not to get into the exuberance of buying a house and chasing after the offer,” says Heck. “Slowing down is important here.”
3. Tap a home assistance program or take a non-traditional approach
You may be able to benefit from homebuyer aid or some emerging businesses that offer you new mortgage opportunities.
Woods says companies like Unison help people get into homes by essentially paying everything on their behalf and taking off the mortgage once the person is in a percentage than a traditional lender when you eventually refinance or sell.
Plus, Woods added, you can always go the “get a deal with your rich uncle” route when it is available to you.
“There are so many different routes you can go, so try to find your way around as many as you can,” says Heck. Your research will help you find the best course for your own situation.
More traditional ways of assisting with down payments are:
—FHA loans that can be secured with as little as 3.5 percent down.
—VA loans, which can be a great deal for active or retired military personnel and their families
—Local and national programs for first-time home buyers
Also, keep in mind that many lenders allow you to secure a loan with less than 20 percent off. You may have to pay for private mortgage insurance until you build more equity, but if you can afford the additional monthly costs, you can still move into a home if your offering is competitive.
Working with a knowledgeable real estate agent remains crucial
In this highly competitive market, it is important to have a knowledgeable agent to guide you. Most sellers receive multiple offers, many of which may be above the asking price. Hence, it is important that you work with someone who really understands the market you are looking in and can help you make your offering as strong as possible, even if the prices are higher than you expected.
A good shopper can also help you tailor and adapt your search as you change your search while streamlining your budget.
With multiple factors driving house prices up quickly, this is a difficult market for buyers. But that doesn’t necessarily mean it’s impossible to buy; it may just require a little extra strategy. Or you can take a break and come back when the market has cooled down a bit.
(Visit Bankrate online at bankrate.com.)
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