The Home Buying Process during the CoronaVirus Pandemic

With the CoronaVirus crisis coming close to its end and Americans starting to focus on very important issues facing society relating to police brutality on a historically disenfranchised race, I thought it would be imperative to walk through the home buying process for those that are thinking about buying their very first or second home as I had to go through the process myself during the pandemic. I wrote about why the pandemic was a great time to purchase stocks in April 2020 and now I want to shift focus to why the real estate market also provides a good buying opportunity in cities where we have a Buyer's market and how my current real estate purchase is coming along. There were certain behavioral shifts and processes which I believe will become the norm which was invoked by the pandemic. First off, the increased reliance on DocuSign was something I noticed as every single document I read or signed was done through DocuSign. Also, the use of video conferencing, be it either through FaceTime or Zoom was instrumental in connecting with real estate agents and touring potential homes from the convenience of my couch. I watched numerous uploaded video tours to get a good feel for each property. Finally, I had an agent map out the entire home buying process on a Trello board which made it very efficient to share thoughts, documents, and collaborate real time while making decisions along the way. 

While the home buying process during the pandemic posed a challenge that both home buyers, sellers, and agents had to overcome, it did force all parties to be flexible, adaptable, and made the process a lot more efficient. In this blog post, I will highlight the main things to keep in mind when purchasing a home and the necessary steps needed to proceed on successfully acquiring a mortgage loan.

Home Buying Process

1. Solidify your financial strength

The first thing to work on before even thinking of making a purchase is solidifying your financial strength. Not only will you reap the rewards of having an excellent credit history, it will also make the underwriting of the loan by the mortgage company very painless. You will earn the respect of the mortgage company and more importantly, the companies will compete to earn your business. Due to the recent drop in interest rate by the federal reserve, I was able to lock in a rate in the mid-high 2's on a 30-year mortgage. This is much more favorable compared to my first mortgage purchase 5 years ago in the mid-4's which I paid off in less than 2 years. In order to get a very favorable rate, it is important to have an excellent credit score (>740). One thing I learned along the way was that a credit score greater >760 does not actually lower your rate any further so being 1 point above 760 should be good enough in theory. Further, having the assets to support the mortgage you plan on taking on is extremely important. The asset could be a owned rental property, a high income, and other investment assets. Having all three obviously plays in your favor as it did in my case. It is important you fully disclose all assets and liabilities when going through the mortgage application as it makes the process painless when you get to the loan processing stage. 

2. Identify the geographic location

Before selecting the specific home to purchase, it is important to select the right state, city, and neighborhood. For folks who plan to purchase a rental, location is a key factor. MoneyCrashers wrote a good piece on where to turn to for good rental property investments. In order to draw renters, the location of the property has to be appealing. A rental near high quality schools will always attract folks with kids who value education and such a property should always be able to be in demand. Being in large cities can also drive demand for a rental. Some millennial's actually do prefer renting in large cities and being close to the daily action. This provides an opportunity to be able to supply the property that can then be rented at an attractive price. Finally, there is a distinction in the profile of the rentals when it comes to temporary or much longer leases. A rental can be located in a tourist destination and can used as an Airbnb which could boost the prices but does require active management unlike a much more passive rental investment that has a 1-2 year long term lease and requires few repairs each year without actively cleaning the home after each visitor. The key things to lookout for when purchasing a real estate property are how affordable the home is, unemployment rate compare to the US average, capitalization rate (cap rate), job growth, population growth, school ratings, and migration patterns.Obviously places like San Francisco and New York City are not good areas to purchase a rental due to the high home prices which significantly lowers the cap rates given there is rent control in place in those states. For states within Texas, it is important to note counties with a high property tax as that could eat into your returns (although it is deductible at the end of the day when filing taxes).

3. Obtain a pre-approval letter

For those in the process of purchasing either their first property, second home, investment property, or vacation home - one thing that is important to have is a pre-approval letter. Not only does a pre-approval letter show to the seller that you are a serious contender, it also gives your offer a leg-up and the amount you are pre-approved for could play a factor in the seller's final decision on who the home goes to. Putting down 20% of the home purchase eliminates private mortgage insurance and saved you on un-necessary fees. It is important to know how much debt is too much for your particular situation. Once you get the pre-approval letter, you can modify the home purchase and loan amount for each offer you turn in so you do not shoot yourself in the foot by sending the seller a pre-approval letter of $250,000 when the offer you plan on sending is $200,000. You can only wonder what the seller would be thinking in such a case. They might be more inclined to negotiate higher if such a situation occurs. Even though you can comfortably afford a million dollar home, you probably do not want your pre-approval letter to state that.

4. Submit a purchase offer

Shopping can be a tedious task when your offer does not get accepted but this is a critical piece and it is important not to get swayed by the market. First off, you should figure out whether the city you are purchasing is in a seller's or buyer's market. Then knowing this, you can strategically think about your offer and what you should demand and may give up on during the negotiation process. It is not uncommon to have a higher option fee and shorter option period in a seller's market while they will be more relaxed in a buyer's market giving you a lot more flexibility in how many offers you can send out. Finally, it is important to act quickly if shopping for a really good deal as you can imagine, there are a lot of other folks also looking for a good deal. Good deals show up all the time. A couple may be going through a divorce and may have to liquidate or an individual may be retiring or be transferred to a new location. I have personally come across such situations while I was shopping for a property and those properties were in higher demand. Finally, you should be aware of the home growth rate and the current market value of that property as that could impact the appraisal of that property because it is possible that the purchase price comes in above the appraisal. Once you find that good deal, you can structure it in a way that will be compelling to have the seller select you as the new homeowner.

5. Shop for a mortgage

Once your offer gets accepted, the next step is to aggressively shop for the best possible rate you can find on a mortgage loan. This involves talking to as many lenders as you possibly can and get as many rates and negotiating aggressively. In this process, you want to keep feelings aside and look strictly at the numbers. Every mortgage company will try to sweet talk you into locking in a rate with them and some might result in saying negative things about the other mortgage company but at the end of the day, select the best mortgage terms for your scenario. Do not only look at interest rate since you can actually buy down your rate but pay very close attention to the lender fees. The lender fee is reflected in the closing cost which is in turn reflected in the final APR. To compare apples to apples, you want to look at the APR offered between different mortgage companies. In my particular case, my APR ended up being slightly lower than 3.00%. Once you are satisfied with the loan terms, you can go ahead and lock it in and proceed to the next steps.

6. Perform an inspection

Within your option period, you want to perform a detailed inspection on the property you purchased. This inspection will highlight any potential issues with the home. The worst ones would be to have structural issues that affect the functionality of the home including, but not limited to, the roof or foundation. A roof or foundation issue could easily cost more than $10,000 so if you are in such a situation, you definitely want to negotiate with the seller to either drop the purchase price to cover that cost or have the seller repair it before you close. If the property only has cosmetic issues, then you can still negotiate with the seller on what you would like fixed. When you are happy with it all then you can proceed if you want to and not terminate the contract. If you feel like the repairs pose a concern then it is advisable to consider terminating the contract.

7. Go through processing and under-writing

While going through the loan processing, you will have to write a check for the option fee and earnest money (typically 1%). Both checks will be refundable at closing. Before closing, the mortgage company will verify all the information they have and perform all their checks. All conventional loans are typically backed by Fannie Mae and Freddie Mac. During this period, you want to be in constant communication with the mortgage loan representatives to clear up any questions.

8. Shop around for insurance

Most folks do not do this but you can substantially lower your closing cost if you shop around. The things you can shop around for are the title insurance/policy and your homeowners insurance. You want to talk to multiple title companies on the policy they offer. You also want to receive quotes from various insurance companies and consider the deductibles and liabilities on each quote. Make note of the line items on the quote and check with the mortgage lender if it meets their requirements.

9. Closing

You get the keys of the home after closing. You will also have to pay the closing costs and down-payment as well. I would recommend a nice glass of cold water or some ice cream if on a hot summer day. Congrats, you are an homeowner! You get a chance to build equity and use the power of leverage to amplify your returns if you selected the right property, right location, right city, right state as well as structure your mortgage loan terms favorably. 

In my particular case, I was able to find a property with no TLC needed, 10-15% below market value and 5% below the listing price by negotiating with the seller. I was able to finance the 30-year mortgage with an APR below 3% in an area where the median household income was >$100,000. Finally, the average (appraised value) 5-year growth rate is 6% for the home with all nearby schools rated an 8-9 out of 10 and a property tax rate less than 2.2% with a median rental rate of ~$1,600/month was what made it a compelling deal. The unemployment rate below the US average and future growth rate higher than the US average in a county with over 2 million people also does not hurt.

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Financial Savant was born in 2018 and has received a really good reception so far. This blog serves as a resource to help spur open discussions on generating income, saving, investing, and overall wealth management.

Every article written on Financial Savant is based on first-hand experience and pertain to ongoing current events within the financial and economic-sphere.

For a detailed discussion of my favorite financial tools which I typically use weekly, you can visit the sidebar on the homepage. I have thoroughly researched all the products and use them personally. I have cut through the clutter so you do not have to. Financial Savant is glad to be a part of the #FIRE movement as we strive to achieve financial independence opening up a world of possibilities while creating generational wealth.


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