In a hyper-competitive housing market, down payment and credit score are essential – here’s why
If you’re looking for a new home, you probably already understand the importance of having a solid credit score and a decent down payment to qualify for a mortgage and make a successful purchase. But do you understand well how critical have these two factors become in the hyper-competitive housing market we find ourselves in today, which is characterized by housing shortages and historically low interest rates?
Here’s a snapshot of the current reality across the country: The average down payment on America’s 11 most competitive subways is 21% according to new research from LendingTree. In some places, like San Jose, California; Hartford, Connecticut and Cleveland, Ohio, 22 and 23 percent down payments are the local average. In addition, 73% of buyers of these competitive subways have a credit score of at least 720.
In other words, it’s not your typical rodeo. If you want to be successful in landing your dream home (or landing a home, period), it’s best to have your finances in tip-top shape.
“In today’s hot market, bidding wars happen hours of a house put on the market. Potential buyers need to employ creative strategies to set themselves apart from the competition, ”says Mark Washburn, real estate agent at Naples Condo Boutique.
You’ll want to keep Washburn’s reviews in mind, especially if you live on the three subways with the the most competitive housing markets, which according to the LendingTree report are (in order) San Jose, Calif. (23.67% average down payment; percentage of buyers with a credit score of 720 or above 84%) ; San Francisco, Calif. (21.43% average down payment; percentage of buyers with a credit score of 720 or above 81%) and Raleigh, North Carolina. (20.39% average down payment; percentage of buyers with a credit score of 720 or higher 70.48%).
Let’s take a closer look at why credit score and down payment are so crucial in the hottest places across the country, and how to get them in order before you embark on the home buying process.
Why these two factors have become so important
Essentially, it boils down to this: In a hyper-competitive market, sellers can be very picky and choose the offer they are most comfortable with, which includes going for the offer that might make the difference. from them most money and that they will be very sure to close successfully without hiccups or escrow.
“In a hyper-competitive market, the buyer has to do just that… be competitive,” says Daren Herzberg, New York-based Babst + Herzberg Certified Real Estate Broker. “The seller has two objectives when choosing a buyer: the highest price and the lowest risk.”
Most homebuyers get pre-approval for a mortgage from a lender to finance the bulk of the purchase of the property. And the contract of sale will depend on whether the buyer will ultimately get that mortgage if their offer is accepted by the seller. In the event that the potential buyer is not approved for this mortgage, he or she can cancel the purchase agreement leaving the seller of the house in a bind.
“When a buyer has a large or large down payment and a fair credit score, it gives the presumption that the buyer can easily manage the mortgage and that if their offer is accepted, they may not fall into receivership. Says Chantay Bridges, of Los Angeles based EXP Realty. “The last thing a seller wants is to start with a buyer and find out later that their pre-approval never turned into approval. They can’t buy the house. “
Ryan McPartland, Senior Mortgage and Mortgage Advisor at Mortgage Acuity, says in such a context, it’s the down payment that’s most critical, especially the serious money deposit.
“The general thinking process is this: the more money you are willing to spend, the more skin you have in the game, the stronger you become a buyer,” says McPartland. “Larger down payments usually indicate more qualified and serious buyers. The ability to save a significant amount of money speaks volumes about the financial strength and responsibility of buyers. Clearly this is not always the case, but in most cases it is. “
This line of thinking is especially true when it comes to serious money deposit, which is the deposit a potential buyer deposits before closing a home to show that they are serious about their purchase.
“If the buyer does not meet his contractual requirements in terms of securing a mortgage commitment within an agreed period, the seller can keep the buyer’s security deposit. The more serious the deposit of money, the more the buyer is at risk and the less the seller is. The lower the risk for the seller, the more attractive the offer, ”adds McPartland.
All of this therefore explains why deposits have become so important. But what about the credit scores you ask for? There are many reasons why credit score matters, but here’s an especially important observation.
Good credit means more loan products for homebuyers to choose from, says Mark Meyerdirk, senior broker at Urban Brokers, based in Wahsington DC. And when home sellers have countless offers to choose from, their agents often prioritize based on the financial strength of a potential buyer taking into account the buyer’s financing. type.
“Setting aside cash offers, buyers using conventional financing are preferred over FHA or VA loans,” Meyerdirk explains. “So a buyer who has the ability to ‘go mainstream’ has a better chance of success when competing with other buyers.”
Ways to separate yourself from the competition
Given this reality, there are a variety of ways to improve your chances of success as a home buyer, including the obvious: improve your credit score and increase your down payment.
“There are a multitude of borrowers with good credit right now. For this reason, it has become all the more important to stand out as a borrower and maintain excellent credit and a strong track record, ”says Adem Selita, CEO and co-founder of The Debt Relief Company.
Some of the best ways to improve and maintain your credit score include reducing balances on your various accounts, including credit cards and loans; not make late payments; and keep your debt-to-aggregate income ratio (DTI) as low as possible.
“Make sure you get your DTI as low as possible. The easiest way to do this is to pay off low balance loans and bonds which can negatively impact your monthly expenses and therefore your DTI, ”says Selita. “The accounts that are likely to be the culprits in this scenario are credit card accounts, personal loans, student loans, and auto loans. If you have one of these types of accounts and they are about to be paid off, take a little extra cash to pay them off completely. This will lower your DTI and, as an added benefit, increase your credit score. “
Make a cash offer
If your funds are unlimited (which is clearly not the case for everyone), you can also consider an all-cash offer, which has apparently become much more common. An all-cash offer is exactly what it sounds like – an all-cash offer, which means the buyer will purchase the property without having to secure a mortgage or other form of financing.
“It is not surprising that these offers are more attractive to the seller, as the risk that a potential buyer’s financing will fail is eliminated, again, resulting in a faster time to close,” says Washburn, of Naples Boutique Condo. “All cash offers appear to be at an all time high right now, particularly in second home markets like Naples, Florida. Many of our buyers have made significant gains in their financial portfolios and are transferring those gains to real estate. “
Under current market conditions, cash buyers have a significant advantage over a traditional buyer looking to finance the purchase of a home, Washburn says.
Include proof of funds when you bid
A much cheaper way to make your home auction more competitive is to provide proof of funds when auctioning a home, says Meyerdirk of Urban Brokers. Essentially, this means providing documentation about your financial assets, which can be used to establish your financial strength with a seller, assuring them that the transaction is not likely to fail.
“Buyers can flex their financial strength by providing proof of funds,” says Meyerdirk. “Buyers who do this should be sure to include retirement accounts (assuming they have the ability to borrow against them) as well as any checking account and savings funds to which they have access.”
Give up the unforeseen
One final way to make your offer even more appealing to a seller is to forgo most eventualities. This is another tip that Washburn offers to its potential buyers.
“The only way to compete is to have as few contingencies as possible in the offer,” he explains. “A contingency is a condition that must be met before the buyer proceeds. For example, a buyer’s offer may be made conditional on the buyer’s home being sold, or the seller’s home valued, and / or subject to a positive property inspection. “
In general, Washburn tells customers to never give up on the possibility of inspection, and for good reason. This can lead to unpleasant surprises for the buyer in the form of substantial repairs that may need to be done later if the house has structural problems. But as a buyer, you may want to consider forgoing other less critical contingencies.
“The current market means that buyers have to go to extraordinary lengths to buy a home – while forgoing at least one normal eventuality can help you stand out, be careful before proceeding with some of these vital protections,” Washburn says.