For many potential homebuyers, purchasing a house in 2016 will not be their first entrée into the housing market, and many will be eyeing an upgrade. In the real estate world, we refer to these buyers as “move-up buyers,” as they’re on the hunt for a property more expensive than their current home. The impetus for such a move could be driven by any number of factors, including an increase in income, a growing family or the need to care for an elderly relative. We even discovered in our 2015 report, “Retrenched & Ready to Spend,” how many in the High Net Worker demographic are bucking the downsizing trend in favor of new, more expensive homes as they move toward retirement age.
If you think you might be a candidate for a move-up purchase in 2016, there are unique factors to consider that you may not have encountered the last time you bought a home, whether it was five or 25 years ago.
TODAY'S COMPETITIVE MARKETPLACE
According to the National Association of Realtors (NAR) October 2015 Realtors Confidence Index, cash sales comprised 24 percent of home purchases. While just 8 percent of first-time buyers made all-cash offers, nearly half (49 percent) of families buying second homes went the all-cash route. While this level marks a slight drop-off from 2010 to 2014, it remains higher than pre-Financial Crisis.
If you are able to pay in cash, you may be at an advantage in procuring your dream home. But for most homebuyers, a cash offer is not the most financially strategic or realistic option. Understanding how you can still make a competitive bid even if you’ll be financing your new home is essential. This is especially true in pricier markets like San Francisco, New York and Washington, DC, but will increasingly be the experience of buyers in markets that heated up at the end of 2015, like Las Vegas and parts of California and Florida.
More than two-thirds of homebuyers who financed their purchases made a down payment of at least 20 percent, according to the recent NAR report. Before you even start shopping around for a new home, it’s important to holistically discuss your finances with your lender to best shape your offer strategy. One advantage for move-up buyers who plan to keep their original home is that they usually have a fair amount of equity and can often use a home equity line of credit (HELOC) to purchase a new home.
BUYING, SELLING & TIMING
If you are looking to sell your current residence concurrently with the purchase of a new home, it's important to partner with your lender early on to develop the appropriate approach to financing. Even experienced homebuyers often enter these transactions with an overly optimistic timeline for their sale and purchase. In reality, it’s rare that the timing syncs up perfectly between both transactions.
In these situations, you may end up unintentionally owning two homes for a brief period. When you purchase a new home prior to making a sale on your existing residence, your lender will need to qualify you on the basis of having two separate mortgage obligations.
The most important thing to do regardless of how your sale-purchase timeline pans out is to meet with your lender early and often to review your options. For instance, if you do end up with two homes you might consider renting out your first home, in which case your rental income can be factored into your financing terms.
NAILING DOWN A DREAM HOME
For some move-up buyers, a new home is an opportunity to start from scratch. New home construction increased by 10.5 percent between October and November of 2015. And while demand for new housing remains below the market’s peak in 2006, it is still an option many Americans are pursuing.
If a new construction project is on the horizon for you in 2016, you may want to consider a construction to perm loan. These loans offer financing flexibility for your new property and in some cases can enable you to remain in your current residence during the construction period for your new house. Your lender can provide financing options that are tailor-made to your current financial situation, including a one-time closing in which the buyer pays interest-only during construction and transitions over to permanent financing when the project is completed. In this case, rate locks prior to closing, and options for either fixed price or cost-plus construction contracts then become available.
Overall, if you are looking to make a repeat home purchase, don’t let a reliance on your past experience be your downfall. The housing market and the home-buying process have changed, even within the last six months. It’s important to meet with your lender early and often in the process to develop a financing strategy that best meets your needs.