Buying a house today is a radically different experience from what home buyers needed to do to get a home just a decade ago. Before the recession, banks were all too eager to loan money for mortgages and sellers were happy to accept buyers who came to the bargaining table with an approved mortgage.
However, the environment for buyers today is wrought with huge hurdles. It's an uphill battle just to get approved for a loan, and many sellers aren't even taking bids from buyers who have mortgages. The buzzword in real estate sales today is "cash," and cash buyers have become one of the biggest barriers to first-time home buyers or anyone relying upon a mortgage to buy a home.
To Buy a House, Cash is King
A recent article from "Realtor," the official magazine of the National Association of Realtors, suggested that all-cash sales were on the rise. Published in April 2014, the article suggested:
All-cash sales accounted for 35 percent of transactions in February, up from 33 percent in January. Individual investors, who make up many of those cash sales, purchased 21 percent of the homes in February.
An all-cash buyer is an extremely attractive bidder to most sellers. They don't have to deal with a bank and the waiting game of mortgage approval and all the hassles that comes from the banking world.
Banks Are Changing Their Ways
Banks make money when they give people mortgages, so it's in their best interest to make it as easy as possible for borrowers to compete with all-cash buyers. Another article in "Realtor" suggests that banks have started to change their mortgage approval processes:
Unlike preapprovals for a specified loan amount, lenders take the approval a step further by thoroughly reviewing all documentation that would be required for a formal approval. This type of underwriting is being completed after a house is selected and an offer is accepted, but before the contract is in place.
However, banks might not be doing enough to help borrowers land their first home. Recent statistics from the "National Association of Realtors" suggests that first-time home buyers aren't just getting squeezed by veteran buyers. They're also getting shut out of buying their first home because of all-cash buyers.
The chief economist for the California Association of Realtors suggested that a lack of first-time home buyers was a "huge problem." She said that:
We have a ladder of home ownership and need first-time home buyers beginning the process of owning, building equity, and trading up to have a healthy housing sector.
What Can a Buyer Do?
Buying a home when there's a lot of competition around is difficult enough, but the process might seem insurmountable without a big pile of cash on hand. First-time buyers probably won't have a lot of cash to pay for a house in full. In addition, families who went through bankruptcy a few years ago and have finally decided to buy another home often won't have the cash either.
"U.S. News & World Report" offers some simple tips for making your bid more attractive to the average seller:
- Get preapproved with a bank (the in-depth pre approval that requires a credit check).
- Look for a property that's overpriced so as to compete against fewer bidders.
- Don't underbid if the house is in a desirable area.
- Send a letter to the seller to develop a personal connection.
- Gather a large down payment of at least 20 percent. 30 percent is even better.
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