If you’ve yet to enter the housing market, but are thinking of buying a home in 2021, there’s a lot you need to know.
As I once pointed out, this isn’t your older sibling’s housing market. Not just anyone can get a mortgage these days. You actually have to qualify. But we’ll get to that in a minute.
Let’s start by talking about home prices, which have soared in recent years. The good news is mortgage rates remain very low, and may even break new record lows this year, which can keep affordability within reach.
Yes, if you’re prepping to buy a home in 2021, expect to be shocked, and not in a good way. At this point in the cycle, home prices have eclipsed old all-time highs in many parts of the country.
And even if they haven’t yet, there’s a good chance you’ll be paying more than the Zestimate or Redfin Estimate for the property in question due to limited inventory and strong home buyer demand.
The bad news for renters is home prices are expected to rise another 10% this year, so things are just getting more and more expensive.
In short, expect to shell out a lot of dough if you want a home in 2021, and that could often mean paying over asking price, even if the original list price seems high.
Speaking of that home being out of your price range, you may want to get pre-approved with a bank or mortgage lender ASAP.
First off, real estate agents won’t give you the time of day without one, especially in a red-hot market.
And secondly, if you don’t know how much house you can afford, you’re basically wasting your time by perusing listings and going to open houses.
This is especially true if the homes you’ve got your eye on are consistently going above asking since you’ll need even more purchasing power.
It’s not hard or all that time consuming to get a mortgage pre-approval, and it’ll give you more confidence and perhaps make you more serious about finally making the move.
Tip: Look for an online mortgage lender that lets you generate a pre-approval on the fly in minutes (and know you don’t have to use them if and when you proceed with a purchase!).
While you’re at it, you should check your credit scores (all 3 of them) and determine if anything needs to be addressed.
As I always say, credit scoring changes can take time, so give yourself plenty of it. Don’t wait until the last minute to fix any errors or issues.
And while you’re addressing anything that needs more attention, do yourself a favor and put the credit cards in the freezer (or somewhere else out of reach).
Lots of spending, even if you pay it back, can ding your scores, even if just momentarily. It can also increase your DTI ratio and limit your purchasing power. Ultimately, bad timing can create big headaches.
Additionally, pumping the brakes on spending might give you a nice buffer for closing costs, down payment funds, moving costs, and renovation expenses once you do buy.
It’s the same story in 2021 as it was in 2020, 2019, 2018, and heck, even as far back as 2012. There’s really been a lack of inventory since the housing market bottomed because homes were never for sale en masse.
During the prior housing crisis, borrowers got foreclosed on or deployed real estate short sales to move on, and banks made sure all that inventory never flooded the market.
Now we’ve got would-be sellers with nowhere to go, thanks to the massive price increases realized in the past few years. It’s hard to move up or downsize, so a lot of folks are staying put. That means less choice for you.
While we saw an uptick in inventory in 2019, it appeared to be short-lived and now housing supply is at an all-time low!
With near-record low interest rates and lots of Americans hitting the ripe first-time buyer age of 34, expect competition to intensify.
Again, this supports the argument of being prepared early so you’re ready to make an offer at a moment’s notice!
You probably don’t have the same skill set as Joanna and Chip Gaines, but you might still wind up with a fixer-upper thanks to those inventory constraints. And that’s totally okay.
What I’ve learned from buying real estate is that you’ll typically never be content with the upgrades previous owners or developers make, even if they were super expensive and high quality. So why pay extra for it?
There’s a good chance you’ll want to make the home yours, with special touches and changes that distance yourself from the previous owner.
Don’t be afraid to go down that road, but also know the difference between superficial blemishes and design challenges, and even worse, major problems.
Especially this year, watch out for money pits that sellers can finally unload because real estate is just so very hot.
Those properties that could never sell may finally find a buyer, and you might not want that buyer to be you.
What’s even more annoying is that you may have to fight to get your hands on the few properties that are out there, depending on the housing market in question.
In popular metros, bidding wars will still take place, and they even become the norm again as they were in previous years.
If the property is popular, there will always be someone willing to outbid you for that home they just must have. This is another reason why the fixer can be a winner, the hidden gem if you will.
That being said, it’s okay to pay more than asking (or even the fully appraised value), just keep in mind that there are plenty of fish in the sea.
Well, perhaps not plenty right now, but there’s always another opportunity around the corner.
Stay poised and don’t let your emotions get the best of you. Like anything else, it’s okay to walk away. Trust your gut.
Just because 2021 will be a seller’s market once again, at least in popular markets, doesn’t mean you can’t negotiate. You can still get into a bidding war, win the thing, and then inspect the heck out of the house.
Inspections are key to determining what will need to be addressed once the home changes hands, and what the seller will need to do to compensate you for those issues.
If you don’t get a quality inspection (or two), you will have a difficult time asking for credits for closing costs or even a lower purchase price. Take it very seriously, the return on investment can be staggering.
Also know that in some markets, buyers may have the upper hand in 2021. Not all real estate markets are red-hot anymore, so you might be able to bid below asking and still get money for repairs.
While you might have your hands full with an overzealous real estate agent, it’s important not to neglect your mortgage homework.
Mortgages are often just mailed in, with little attention given to where they are originated.
Your real estate agent will have their preferred lender that you “really should consider using because they’re the best,” but you don’t have to use them or even speak to them.
I’ll typically say get a quote from them as a courtesy to keep things amicable, and to appease your agent, but also shop around with other banks, credit unions, lenders, and mortgage brokers.
At the same time, think about how you want to structure the mortgage, including down payment, loan type (FHA or conventional), and loan program.
The 30-year fixed isn’t always a no-brainer, though right now it’s a tough argument to go against it.
There are other loan programs that can make sense too, such as the 5/1 ARM, which often get swept under the rug. Make the choice yourself.
If you’ve done your homework and are in good financial shape, you should be able to get your hands on a very low mortgage rate in 2021.
In fact, mortgage interest rates are historically amazing at the moment and could even reach new depths depending on what transpires this year.
Once again, the 2021 mortgage rate forecast looks excellent, so they may stay put for awhile longer or even hit new all-time lows.
In terms of financing, it’s still a great time to buy a home. Consider that the silver lining to an otherwise pricey and competitive housing market.
Of course, with home prices creeping higher and higher, even a low interest rate may not be enough to offset that growing monthly payment.
So always make time to shop to ensure you get the best rate and the lowest fees, even if financing is on sale.
Just because rates are cheap doesn’t mean you should just accept what’s thrown in front of you. Still complain, still negotiate, still ask for more!
Before you get too excited, or worried that time is running out, it might actually be in your favor to slow play this one.
Per Zillow, the best time to buy a home may be in late summer, including the months of August and September.
Basically, you’ve got the slow, cold months at the start of the year where there isn’t much inventory, followed by the strong spring housing market where everyone and their mother wants to buy.
Then you get a lull and perhaps even a dip in home prices during summer, which could be an attractive entry point.
You might even get lucky and snag a price cut with a lot less competition while other prospective buyers are on vacation.
That being said, get pre-approved NOW and set up your alerts for new listings ASAP and just be ready to pounce whenever.
Lastly, take a moment to ensure you actually want to buy a home as opposed to continuing to rent.
I constantly hear the old “throwing away money on rent” line and it never gets old. Then I proceed to fantasize about renting with not a care in the world.
Are you sure you’re throwing away money on rent? Renting can be pretty awesome.
You don’t pay property taxes, homeowners insurance, HOA dues, PMI, or mortgage interest. And you can leave whenever you want. That sounds like a sweet deal too.
Oh, and if anything goes wrong, you can just call your landlord or property management company.
With a home, the problem is yours, and yours alone to deal with. Broken water heater? You’re paying thousands out of pocket, not the landlord.
One extra thing to consider given the ongoing COVID-19 pandemic that reared its head last year.
As you might expect, it’s making the home buying and selling process a bit more complicated than usual, despite companies learning to adapt.
For example, home sellers are more reluctant to hold open houses or let anyone in their home, and prospective buyers are probably also a bit apprehensive entering a stranger’s house.
But it’s still very important to get a good look at a property you’re considering buying. The same goes for the home inspection and the home appraisal.
Both should still be taken very seriously, even if more difficult to complete.
A home purchase doesn’t necessarily have to be put on hold due to COVID-19, but it might require more thought given the increased uncertainty with the economy, demographic shifts (city vs. suburban living), and so on.
Also, think before you make a complete lifestyle change like moving out of the city and into the country, just because it’s on-trend. You might look back in a year or two and say what was I thinking?!
Ultimately, you should always give a home purchase a ton of thought though, so for me not much has changed.
Read more: When to look for a house to buy.