Advice for homebuyers in hot market: Get mortgage approval before shopping

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As president of ICE Mortgage Technology, Joe Tyrrell has a front-row seat to the action in the white-hot housing market. He also has experienced the challenges consumers face. Tyrrell recently bought a home — and, like many determined buyers, he agreed to forego a home inspection.

“That’s just part of the reality right now,” Tyrrell says.

Tyrrell felt comfortable skipping an inspection because the seller had hired a home inspector before putting the home on the market. Bidders had access to that evaluation, and Tyrrell relied on it to make his bid.

While many buyers are waiving contingencies around inspections, Tyrrell says buyers still should hire an inspector.

“The good news is most quality Realtors will tell you to go ahead and get your inspection,” Tyrrell says.

Tyrrell spoke to Bankrate.com about the housing market.

What’s the biggest challenge for consumers?

Tyrrell: Home prices are going up in virtually all 50 states. For buyers, it changes the way you approach financing. Consumers are learning that they need to be buttoned down before they start shopping. You’re in a really competitive situation if you’re looking to buy a home. In many cases, you’re going up against all-cash buyers. If you have the contingency of a loan, it might make your offer a little less appealing. So consumers are saying, “I want to be approved as I possibly can be. Get me to a point where I am completely approved, and the only thing you need to see is the subject property purchase price and address.”

In this market you should get approved for as much as you can. In other words, if your price range is $300,000, you should get approved for $400,000. You want to know what you have that flexibility.

Everyone is wondering when rising mortgage rates will affect demand for homes.

We’re not really seeing the demand slow down. It’s still a very robust mortgage market. And there’s still a significant amount of refinancing activity. Historically, the guideline was if there’s  a 50-point spread between the current rate and the rate you have, it might make sense to refinance.

But people’s equity also is changing. 2020 had one of the highest rates of cash-out refinancing ever. It’s a way for homeowners to access that equity and do things like remodel the kitchen, now that they’ve been sitting there and staring at it for the past year. Or maybe I need an addition, because I’m going to be working from home for the foreseeable future. So even if there’s less than a 50 basis point spread, there could be reason to keep the refinancing activity going.

With the housing market so hot, some warn of a bubble. Any concerns?

Tyrrell: It’s really frustrating for buyers right now because the lack of inventory is so dramatic. The traditional process — make an offer on a home, sell your home and then close on a home — has really been challenged. We’re seeing a lot of people sell their homes, then rent a place while they look for a new home. But the challenge is the rental market is so hot right now that you have to make sure you can find a place to rent.

With rates going up, are you seeing more borrowers willing to pay points to lower their rate?

Tyrrell: Points up front for the most part had gone away. The market is just so competitive. But what you’re seeing now is lenders giving borrowers the option to pay points.

This always gets back to the age-old question: How long do you think you’re going to be in the house? If it’s a first home and you really only see yourself there for three or four years, then buying down the interest rate doesn’t really make sense. If it’s a long-term play, then buying down the interest rate makes sense because you’re going to save thousands and thousands of dollars over the life of the loan.

Where do you expect mortgage rates to go this year?

Tyrrell: There are three main prognosticators in the industry — Fannie Mae, Freddie Mac and the Mortgage Bankers Association. They’re all expecting that rates will increase, but they’re all expecting it will go up to different levels. They all have rates going up to the 3.5 percent to 3.75 percent range. Even if rates were to go to 3.625 percent, you’d still have 7 million homeowners who could benefit from refinancing, because their rate is 75 basis points above that. So there’s still a massive opportunity for millions of people.

Why have so many homeowners not taken advantage of the refi window?

Tyrrell: We’ve been looking at that question. For some, it’s just the fear of COVID. What happens if I lose my job and I’m in the middle of my transaction? Some entered into homeownership recently and don’t feel they have enough equity. That’s interesting, because some millennials might be paying mortgage insurance, and they’ve had enough appreciation that they’re now above 80 percent loan to value, and they can get out of a significant monthly cost. There’s still a lack of consumer education about the reasons why you should refinance. It’s not just about getting a lower rate.

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