I share thoughts, experiences and DOs/DONTs on my journey entering the hot 2021 housing market in the search of my first real-estate property to own long term. My objectives for entering the market now may be different than the next person but it is something I have been planning for a while – to own a physical asset class that is a part of a larger diversified portfolio and one that I can derive value from (one beyond just monetary).
Two and a half years in the making
Back in last 2018, I made the efforts to learn about the credit space and how crucial it is for anyone to be able to afford something on leverage/debt or even rent. I realized back then, to not get ripped off on a high interest rate purchase of, say a car, or rent a property without having to pay non-refundable deposits (if not be denied), one had to build a good credit profile (score, etc…).
Hence I started by opening various credit cards according to a detailed game plan – paying them off before due (personal choice – I do not like owing anyone money) and build a strong credit score in the long run (all the queries fall off in two years). I never opened a card if I knew I could either – not pay the annual fee or pay off my balances every month. All in the meantime, I collected points/miles/cashback which I use towards travel.
Additionally, I knew at some point after graduating, I’d have to move and potentially buy a different car than the one I had then (paid for in cash) as well as rent an apartment in a new area. Both would be big financial undertakings and I needed to be prepared to get the best possible deals. I ended up buying my second car with a great interest rate (at the time) to me – which I covered in detail in another article – Why did I finance my car purchase instead of paying cash?
That added a new mix to my credit profile – helping boost it by showing a strong paid on time summary across multiple accounts. Plus, my DTI (debt to income ratio) is less than 8% – something believe it or not, lender actually want to see as not 0% or over 35% (as that shows they can make money from you on a product/loan).
Since my car purchase in Dec 2019, I’ve consistently been paying off my loan and that has helped me with my mortgage pre-approval process in securing the lowest rates from lenders.
Always get pre-approved before scouting any houses
This is something I actually did not do when I first started house hunting in February 2021. I knew my lease at my current location would be expiring in the summer so I had a timeline to find another place to stay. I made the decision to buy instead of continue renting as I knew I would be living in my current city for a few more years, work at my current company and also build equity instead of help someone else do that. Additionally, I wanted to diversify my wealth and not just limit it to cash (equivalents), investments and my car (which is a depreciating asset).
It is very important you understand your credit profile (and mix) well before you approach any lender. Multiple websites will throw low interest rates to lure you in but they have very tough underwriting processes to determine how much you actually quality for and at what interest rate (based on the duration of the loan).
In 2021, interest rates are really low and inventory in almost all markets is really low. It used to be 2.5 months in my area in January and by May (at the time of writing this), is <1 months. That means, on average, a house listed for sale is being closed on in less than one month. In my shortlists, houses are generally being listed and marked as ‘Sale-pending’ or ‘Under Contract’ in less than a week.
Additionally, realtors are less likely to work with you until they know your true buying power. In my opinion, you don’t want to waste anyone’s time – including your own – hence, ensure you get your finances in order – because you will have to submit EVERYTHING that has your name on it.
I had to provide:
- Verification of Employment letter
- Past four (two will suffice too) pay-stubs
- Bank statements going back 45 days (to check proof of funds)
- Investment account statements
- Retirement account statements
- Asset/liability statements (my car loan)
- Copy of DL/Passport/VISA (if international person)
- Proof of current residence and rent statement
- Copy of Social Security Card
- Address of potential property (to get an estimate)
I may have missed out one or two more things but it’s what is primarily needed to underwrite your loan (after determining how much you qualify for).
Finding the right realtor/real estate agent for you
This is the second most important decision you will have to make before you scout houses. Do not blindly sign up with a realtor you find on Zillow/HAR/realtor.com/etc… . I am not implying that they are bad at what they do or that they will not have your best interests at heart. Instead, I am letting you know you have the right to interview people – over the phone or virtual is perfectly fine – if you don’t want to meet in person and avoid awkwardness. You need to prepare a list of questions that are important to you and then search online on other questions to consider.
You need to be confident the person you pick, is the person you want representing you when you go into either see/tour/put an offer on a house. They need to offer full transparency in the process and you need to also ensure there are no ‘gotcha’ tactics at play. Remember, you do not pay your realtor as a buyer, that is the sellers job at closing. Please read more on that based on your state/county/region and do not take this at face value.
If you do not wish to continue working with a broker or agent, let them know in a polite manner and treat them with the same level of respect as you wish to be treated. Bottom line is, don’t let them waste your time and don’t waste their time by stringing them along if you’re not yet ready to buy.
Your agent is going to be fundamental in you getting a deal which does not always have to be the highest offer – so make your choice wisely – and do not be afraid to let someone go if it isn’t working out for you.
I will cover other factors that go into this decision process and journey in my next article – like sustainability, affordability, cashflow, income analysis, downside and upside risk, etc… .