Shopping for a home? Financial planners offer 4 dos and don’ts for buying in the current market

It’s no secret the housing market has been on fire lately. According to the National Association of Realtors, increased demand colliding with a slightly increased but still-limited housing supply pushed the median house price in the US to $363,300 in June.

That’s 23.4% higher than the median price buyers expected to pay last year, which helps illustrate why you need to understand the dos and don’ts of participating in such an intense housing market if you want to buy right now.

Do: Know your numbers beforehand, and prepare for a long search

Jason Dall’Acqua, financial planner with Crest Wealth Advisors, acknowledges the reality of the current housing landscape. “It is a competitive market,” he says, “but don’t let that influence your numbers.”

He says buyers need to understand how much they have for a down payment, and what kind of monthly costs can reasonably fit into their budget before starting to look for homes. “Stick to those numbers and don’t be lured into going beyond them just because there are other offers on a property,” he advises.

Once you understand your home-buying budget, get serious about your house hunt. “One thing I tell all my clients is to look at a lot of homes,” says Steve Zakelj, financial planner at Flatirons Wealth Management. “The more homes you see, the more you’ll understand things you thought were important may not necessarily really be, and things you hadn’t even considered, you may see in a home and realize would actually be quite nice to have.”

Don’t: Use cash from emergency funds or accounts earmarked for retirement 

Dall’Acqua says that your calculations need to account for both unexpected and ongoing costs of homeownership. That could include annual maintenance and HOA dues, but it might also mean factoring in the cost of moving, buying new furniture, or renovations that you need to do sooner rather than later. 

The cash you save before buying a home should cover not just the down payment, but these other expenses as well. And you still need to leave a cash cushion in your accounts somewhere. “You do not want to wind up house-rich and cash-poor with no emergency savings to fall back on,” says Dall’Acqua.

That means avoiding pulling from those reserves to come up with the necessary funding for a home. The same goes for your retirement accounts; you shouldn’t look to use money that needs to stay invested for the long-term to provide for your future needs.

Do: Explore your financing options

Even with the increase in all-cash offers in some real estate markets, most people still use some kind of financing to complete the purchase of a new home. The conventional 30-year, fixed-rate mortgage is always a popular choice, but it’s not the only option you have. 

In fact, it might not even make sense to go this route if you’re buying in an area with much higher average home prices than the median price in the US.

Noah Damsky, a financial advisor with Marina Wealth Advisors in Los Angeles, encourages clients to at least explore financing options that might come with higher loan-to-value limits or lower down payment requirements. He says this makes sense in the current environment, given how low interest rates are.

“Potential homeowners can buy with as little as a 5% down payment without the hassle and adverse terms that come with FHA loans,” he explains. “These loans do come with mortgage insurance, but that fee is relatively low when compared to the benefit of a lower down payment.”

Damsky does caution that this strategy works best for buyers who are comfortable taking on a larger mortgage balance, which isn’t the right choice for everyone. But this is just one specific example; the broader advice to explore options so you understand your choices before choosing a home loan type applies to everyone.

Don’t: Get sucked into a bidding war or waive a home inspection

John C. Pak, a financial planner with Otium Advisory Group, urges caution for buyers who might find themselves competing with many others to purchase a particular home. 

He says bidding wars can drive the price of a home up another 10 to 20%, which can make the final price shockingly high in a market where the average home price is already up 13% from the previous year.

The problem can compound when buyers also waive home inspections. “Buyers can use this powerful tool to either cancel or negotiate the price of the home,” he points out. An inspection may cost you somewhere around $500, but it can uncover critical flaws or potential problems that must be fixed that will save you exponentially more over time.

Pak also notes a final important “don’t” — don’t get discouraged!

Pak says buyers can blame supply and demand for the elevated home prices we’re seeing right now, but that the trend isn’t permanent. “Inventory will gradually increase as we come out of this pandemic and more existing homes will become available to the market combined with new construction,” he says.

In the meantime, he encourages people who want to buy to continue focusing on strengthening their financial position so they’re ready when the time comes. Keep allocating cash to build your down payment, pay down existing debts or avoid new ones, and don’t rush into a real estate decision that you may later regret.

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