Smart Money Podcast: How to Buy a House in 2021

Sean Pyles: Welcome to the NerdWallet Smart Money podcast, where we answer your personal finance questions and help you feel a little smarter about what you do with your money. I'm Sean Pyles.

Liz Weston: And I'm Liz Weston. Want us to answer your money questions? Well, send them our way. Call or text us on the Nerd hotline at 901-730-6373. That's 901-730-NERD. Or email us at [email protected].

Sean: And hit that subscribe button to get new episodes delivered to your devices every Monday. And if you like what you hear, leave us a review.

This episode, Liz and I are wrapping up our #NewMoneyGoals series with a conversation about what homebuying will look like in 2021, with mortgage Nerd Holden Lewis. Spoiler alert: It's going to be competitive. But first, in our “This Week in Your Money” segment, Liz and I are talking about NerdWallet's 2021 Best-Of Awards.

Liz: Each year, NerdWallet puts together a list of the best financial products, from savings accounts to cash-back cards and even car insurance. And while our Nerds judge each product based on its own criteria, the guiding principle of what makes a best product is that it's consumer-friendly and helps you take control of your money.

Sean: So to help you, our listeners, get the most of the hard work that all of our Nerds have done, Liz and I are going to give you some background about the awards and how they can help you make smart money moves.

Liz: Yeah, a lot goes into it. More than four dozen of our writers and editors work on the Best-Of Awards. And they come up with rubrics to judge all these different financial products. For mortgages, for example, the evaluation looks at the loan types that are available and the online capabilities of the lenders, the online rate information, it looks at customer service and at complaints filed with the Consumer Financial Protection Bureau.

Sean: These rubrics are massive. I mean, it's no secret that we at NerdWallet love a good spreadsheet, and these things are really detailed and incredible. So kudos to all the Nerds who spend hours and hours doing this. But the goal is really to make objective ratings on these different financial products. We want to help you make the best decision and have the best products possible because it's no secret that shopping around and using financial products isn't really easy. But one thing that I think is really interesting about the Best-Of Awards is that it really is the culmination of NerdWallet's mission, which is to provide clarity for all of life's financial decisions. And oftentimes, making decisions requires getting a financial product, but you don't want one that might have really high fees or has really horrible customer service, or there's some sort of sneaky thing in the fine print that you don't find out about until it bites you in the butt. So our goal is to make it so it's easy, so you can compare different financial products.

Liz: Yeah. And if you haven't heard our origin story, our founder, Tim Chen, originally started the company after coming up with a spreadsheet for his sister. His sister wanted to know what was the best credit card for her. And he realized that there weren't any good resources out there to help her with that question back in the day. So he came up with a spreadsheet to help her, and then her friends started bugging him about it. And that created a website, and that led to the foundation of NerdWallet.

Sean: And now here we are in your ears talking to you about it.

Liz: Exactly.

Sean: One thing that's interesting about making financial decisions, and financial products that you might need to look for, is that it's not every single day that you're choosing one to get. You're not applying for a credit card all the time or, in my case, applying for a mortgage — something that I just did this past fall. And I thought that I was comfortable shopping for financial products, having been at NerdWallet for about five years at this point, but I really didn't know where to start. It turns out these things are very technical. They're very big, they're for a lot of money, and there are all these different scary companies that I'd never heard of before. So I ended up going to our page of the best mortgage lenders and getting to know what different things I should be looking for, like what kinds of fees I might have to pay, and what makes one company better than another when it comes to their customer service or their online interface. All these things I hadn't really considered before.

Sean: And so once I looked through all the different roundups that we have, and I found the best financial products, I was able to apply for five different mortgages and then do my own homework, getting to know what the lender's fees were, what the title fees were, what would be due at closing and what my PMI would be. So that way I could price-compare on my own terms based on the initial research that NerdWallet did for me.

Liz: Wait, wait, wait. You applied for five mortgages?

Sean: I did apply for five mortgages. Yes. I am someone who loves to be very methodical and take my time, especially when it comes to getting a mortgage — it's a pretty big financial decision. So I wanted to make sure that I could get the best price possible. And in the end, because I had applied for so many, I was able to negotiate, and I was able to save around $900 by haggling with one lender over another because of the fees.

Liz: Yeah. OK. Well, I was just thinking about in the days before I came to NerdWallet, I would double-apply because that was, to me, the way to get the best deal. I didn't really have a good way to compare lenders. So I'd just make the applications. I never thought to do it five times, that's really impressive.

Sean: Maybe if we weren't in a pandemic, I wouldn't have done five applications, but I had plenty of free time.

Liz: OK. All right. All right. That's cool. But the nice thing about NerdWallet is it's like a boutique versus a department store. So the boutique, they do the calling for you. You're still making the choice. It's not like they have one shirt or one pair of pants. They have many choices for you, but the initial cull has been done.

Sean: Right. You can trust the people that are putting this together for you, that they have your best interest in mind.

Liz: Yeah, exactly.

Sean: And in the coming weeks, we're actually going to be talking to some of the Nerds behind the Best-Of Awards, the people who actually did this work. So keep an ear out for that.

Liz: All right. Sounds good.

Sean: And now, I think we can get onto our conversation with Holden.

Liz: Let's do it. Hey Holden, welcome back to the show.

Holden Lewis: Hey, thanks for having me again. This is really my pleasure.

Sean: Always a joy to talk with you, Holden, especially when we have a topic that is so hot right now. 2020 was a record-breaking year for too many reasons. I think we all know that, but it was an especially active year for homebuying. I'm wondering what you think the market looks like at the outset of 2021.

Holden: The watchword at the outset of 2021 is "competitive." Owners are reluctant to put their homes on the market because they don't want strangers walking around in their homes, but there is a ton of demand. You just keep getting this big wave of people entering their early 30s, which is the prime first-time homebuying age. And, of course, people, they want to move out of the cities. I think that that's a little bit of an overblown explanation for the high demand because yeah, sure, people want to move out of the cities into the suburbs, but they're being replaced immediately by people who want to move to the big city. I mean, come on. You're 29, 30 years old, you want to go to the big city.

Sean: Well, I will be really interested to see how the vaccinations shake out with the way the market's been going. The whole thing with 2020 was that people wanted to go out and get somewhere with a yard so that when they were hunkering down, they could have a little bit more space for themselves. But as people get vaccinated and life begins to return to some semblance of normal, I wouldn't be surprised if the trend began to reverse itself.

Holden: I wouldn't be surprised either. I mean, you have a lot of things going on. First of all, sure, people might feel a little bit less pressure to buy right now when the vaccinations start up. But also the number of homes that are available in the market is so low that I think that it discourages a lot of people. So people might just want to wait until the summer figuring, "OK, I'll have a bigger selection in six months."

Liz: Now, one trend we didn't discuss is the remote trend, remote working trend, because more companies have realized, "Hey, this actually works," and are allowing their people to work from anywhere. I know this is by far not the majority of employers, but do you think that's contributing to this effect at all?

Holden: I think that that is some of what's happening, but one thing you've got to remember is, yeah, there's people who figure, "Oh, I want a bigger house in the suburbs, so I can have a home office and also maybe have a room devoted for online learning for the kids." You might see a group of people who say, "Hey, if I don't have to worry about commuting, if I don't have to worry about getting on the subway to work in my office in Manhattan, maybe I'll want to move from New Jersey to Brooklyn." You know what I mean? I think that there's an element of that, too.

Sean: That is a big part of what my partner and I were thinking about over 2020. And I actually ended up putting a deposit down on a new build that should be finished sometime in the spring. And that's in part because my partner's firm — he's an architect — previously, they were very opposed to remote work, but they saw that they sure can make it work because they had to over 2020. And now going into 2021, it seems like they're going to have a hybrid approach moving forward. So we wanted somewhere where we could have a little bit more space. We wanted someplace that was kind of a retreat. Yes, the pandemic is going to be somewhat under control kind of soon, hopefully, but there are still going to be things that we want to get away from, like climate change or whatever. And so I ended up buying a house in what I'm thinking will probably be a bit of a Zoom community.

Liz: Oh, interesting.

Sean: Which is a term that I think we'll be hearing more and more of. I wouldn't be surprised if that trend, while it might diminish a little bit, I don't think it's going to fully go away. In Oregon, Bend has kind of become a hot Zoom community because a lot of people want some place that has beautiful nature, that isn't as crowded, but they can still get a nice home.

Liz: And that trend was actually starting before the pandemic. Places like Bend, and I mention Colorado, because a lot of people are attracted to the activities, the outdoor stuff you can do there. So I think the pandemic just accelerated what was already going on.

Sean: Yeah. And at the same time, because people are moving to these somewhat smaller towns in different areas, the home prices there are going up. For example, the town where I'm buying a house right now, when I bought it, the house was 260, which is part of why I bought it because it was pretty affordable. When my partner and I did the math, we realized that both of our mortgages will cost less than what we were paying for a 550-square-foot apartment in San Francisco.

Liz: Wow.

Sean: So that tells you multiple things. One, how wild the market is in San Francisco, but also that things are pretty affordable up in the Pacific Northwest. But anywho, I looked at the market and a similar-size house is now $60,000 more than when I put down my deposit in September.

Liz: Wow. That's a big change.

Holden: Sean, you're buying a new-construction house or are you waiting for the construction to actually finish? And then when you talk about when prices went up, are you talking about brand new houses by the same developer, or are you talking about comparable, used houses in the neighborhood?

Sean: I am buying a new house, and the foundation was just poured a couple weeks ago, which has been pretty exciting to watch. I'm having my real estate agent send me biweekly updates. So, when I talk about comparable prices, these are also new builds that have yet to be fully constructed in the same neighborhood, same size practically. And yeah, they are about $60,000 more than what I paid.

Holden: Woof. Man.

Sean: Again, great, great timing. I feel very lucky that I got that house when I did, because I purchased it right when the season was winding down in September. There was kind of a lull until just recently, and now they're picking up again and all of the new houses are at that newer price point.

Holden: Well, I feel kind of bad for people who started looking in December instead of September.

Sean: Well, for people who are hoping to buy a house in the new year, I'm thinking that rising prices will continue to be a challenge, but are there any other unexpected parts of the homebuying process that new buyers should be aware of right now?

Holden: Getting a mortgage preapproval before you start looking at houses is pretty much a precondition at this point. Real estate agents, they don't want unqualified people just trooping through their houses. You need to be pre-approved for a loan, just really to be able to look at houses and to have an offer considered. So what'll happen is a lot of times as a home buyer, you'll go to a real estate agent and say, "I want to start looking at houses." And they'll say, "Great, let's work on that pre-approval letter first." Because the agents who are working on behalf of sellers are going to insist on that.

Liz: Holden, could you explain the difference between pre-qualified and pre-approved?

Holden: Sure when you are pre-qualified for a mortgage, they're basically looking at your income and your debts and basically saying, "Oh, OK. Yeah, it looks like you're going to be able to qualify for X amount of a mortgage." When you are pre-approved, they are taking a closer look at your income and at your debts. And they're also looking at your credit score. And so it's just a finer-tuned version of what you're going to be able to afford to borrow. How much you can borrow and roughly what interest rate you can borrow. Because if you have a credit score of 740 or higher, you're going to get the best available rates. If you're below that, you might have to pay a slightly higher rate. So checking your credit is a really important part of the process. And pre-approval looks at your credit, and pre-qualification does not.

Liz: And if you do get a higher interest rate, that could limit how much you can borrow, right?

Holden: Exactly. When you have a higher interest rate, your monthly payments will go up for a given amount. And so what that means is with a higher interest rate, you're going to qualify for a smaller amount and it can make a pretty big difference. A quarter of a percentage point could make a difference of 10, 20, $30,000 just to reach the same monthly principal and interest payment.

Liz: So it's worthwhile to work on that credit score, right?

Holden: It is definitely worthwhile to work on that credit score, but I do want to mention this. And that is that you don't have to have immaculate credit to get a mortgage. Yes, your best deals are going to go to people who have credit scores of 740 or higher, but the FHA and the VA exist partly to allow people with not-perfect credit to borrow. And if the time is right for you in your life to buy a home now, and your credit hasn't been built to where you want it to be, you can get an FHA loan or a VA loan, get into homeownership. And while prices are rising so fast, I can see where a lot of people would say, "I want to buy right now. I'm ready. I don't know if I'll be able to afford something a year from now, let's go ahead and get an FHA loan and get into a house now."

Liz: Yeah. And if you can afford the various costs, that can make a lot of sense.

Holden: With an FHA loan, and also with a VA loan, you do have some upfront costs that you have to pay. Either upfront mortgage insurance for a FHA loan or a loan guarantee for a VA loan. Yes, it's some upfront money that you have to pay, but it really might be worth it just to be able to get into a house now instead of later.

Sean: That brings me back to thinking about how competitive the market is right now. And I felt really lucky finding this house when I did. My partner, when he bought his house, it was a similar situation where he just found the right house at the right time. But come spring, things are going to be very competitive yet again. So I'm wondering how you think people can stand out in a really competitive market.

Holden: There are a number of ways to stand out. And one of them is just make a competitive offer from the outset. I've talked with real-estate agents who say that when their clients, especially first-time buyers, when they're getting ready to make an offer, what the agent will say to the client is, "If you don't get this house, will you regret not offering $500 more?" When the client says, "Yes, I probably would." Then they'll say, "OK, now let's say you offered that amount. Then would you regret not offering $500 more than that?" Until they get to the point where, "This is how much I'm willing to pay." Making that competitive offer and making a realistic offer on the other hand. Like don't offer more than you can comfortably afford. You might think, "Well, why would I do that?"

Well, you might do that if you've made five offers and all of them were rejected. The sixth time, you might say, "All right, I'm going to shoot the moon. I won't vacation for the next 10 years." At that point, you've got to calm down, "Maybe I need to take a break for a few weeks to kind of screw my head back on right."

There's one other thing to talk about as far as standing out in a competitive market, and that is, decide quickly. A lot of sellers, they're getting multiple offers on the day that it goes on the market. In October, the latest stats I have, almost three-quarters of homes sold in less than a month. The houses are just going so fast. The sellers are getting multiple offers in just a day or two. So you really, really have to make that decision immediately. "Is this a house I want to make an offer on?"

Sean: I'm wondering how you strike the balance between that. I'm thinking, as I hear you say this, about my sister and her boyfriend who are trying to buy a house in central California. Prices are going up, things aren't staying on the market longer than a week. My sister is more in the camp of, "Let's do this. We got to get in now, even if it's a house that needs a little bit of work." Whereas her boyfriend is much more conservative and it takes him months to decide what color to paint the wall in a house. So how do you figure out when is the right time to make that decision?

Holden: Well, you have to make that decision ahead of time really. And what you need to do is have your checklist. I mean, seriously, have your checklist of things that you're looking for and deal breakers. For example, your deal breaker might be having one and three quarters bathrooms instead of two and sticking to it. Once something ticks all the boxes, go out and make an offer.

Sean: We like to say sometimes that the best time to buy a house is when you're ready to buy a house. And that means financially having the money saved, having your credit in a pretty decent position, but also being mentally prepared to do that. And I think that that's something people need to think about as well, is when are they ready personally to do this.

Liz: And you do need to be able to stay put for a while. Three years, four years, five years, just to make sure that the appreciation offsets the cost of buying that house. And then again, selling it.

Holden: Sean, how did you know?

Sean: How did I know? That's a great question, Holden. I have been saving for a while. My partner and I had this initial plan of, he would get a house in Portland and I would spend time saving up for my own down payment on a house. And then we were going to get another house in Portland and maybe rent out this first one. While the home prices in Portland have gone up so much, I can't really afford a house here anymore. And so we tried to find a compromise of, have a house that I can afford, but also have something that's maybe a little bit different from what we have here in Portland. This was also in the middle of 2020. We were living through the pandemic. When I bought the house, it was when the wildfires were raging on the West Coast and we wanted somewhere that we could retreat to.

And everything kind of fell in line at the right time where I found out about this beautiful little beach community on the coast of Washington. I had this money saved and I said, "OK, I can do this. I'm financially prepared and I'm mentally ready to get something of my own." And I kind of pulled the trigger.

Holden: See, that's interesting that different people have different, well, triggers. For you, you were already financially ready, you'd been thinking about it a long time. So the trigger was really finding the town, whereas for some people, they might know exactly what city they want to live in, what neighborhood, and the trigger is getting their credit score to where they want it to be or saving up a certain amount of money.

Sean: Yeah. That's a really good point, because we did look at coastal Oregon and it's pretty expensive, and things that were in my price range weren't quite at the standard that I was looking for in a house. So yeah, I heard about this great town and it just seemed to be the right fit at the right time.

Liz: I want to give some hope to the people who are making offers and getting blown out of the water by people who can pay twice as much in cash or whatever. We had that situation of making a full-price offer on a house and having it rejected. It was like, "What else can we do?" Obviously you can bid more, but in our case, it turned out to be the best thing because the next house we saw is the house we're living in now. And I remember telling my husband, as we're walking up the sidewalk, "Now, this is not going to be an emotional decision. We have to be logical about this." I walked in the door, fell in love and it was like, "Whatever you want. Here, take all my money."

I also had friends who had the opposite experience, who were kind of panicked into buying a house that they still have and they're not crazy about it. They're not crazy about the house. They're not crazy about the neighborhood. They feel like they had to grab something. So I would just say, make sure this is the right house if you're going to go all out and make a top-of-the-line offer.

Holden: I do worry about that. I worry about people making that panic offer and they haven't fully vetted things like neighborhood noise, commuting time. You really got to know your neighborhoods. I think that has to be part of the calculus, is really identifying what neighborhoods you're going to look at. That way you're just less likely to end up buying a home, moving in, and then being surprised because you didn't realize that there is a garbage dump.

Liz: Yeah, go beyond the neighborhood. That's kind of what I wish my friends had done. What's down the street is commercial, and that's what makes them uncomfortable. It's not residential.

Sean: Another thing I want to talk about are love letters. These are things that prospective buyers will write to a seller, hoping that they can get on the seller's good side, make a case for themselves and get this house and stand out. What do you guys think about these?

Holden: I think they are a fair housing nightmare. I think a lot of times these letters, first of all, they have a photo of the family in them. And so the unspoken message, or maybe it's actually spoken is, "Pick me to buy your house because I'm just like you." And what that can translate into is, "We're white too." Or, "We have children too." It implicitly invites discrimination. Even if the seller discriminates subconsciously, they might end up discriminating and it just seems deeply unfair.

Liz: This is something I never thought about until one of our colleagues, Barbara Marquand, wrote about it. Once I realized what was happening and what could happen with these letters, it really makes a case for "don't do it." Don't encourage it. Just make a really good offer.

Holden: I've asked real estate agents about that in the past. And just in the last couple of years, agents have been really non-committal about it. They're not suggesting it. At least most of them aren't. They're definitely not enthusiastic about it. I think maybe love letters will be sent if the prospective buyer insists, but agents just, they're not comfortable with it.

Sean: Holden, I have a final question for you. And this is kind of technical and it's about buying down the rate on a mortgage because I have yet to actually close on my mortgage. I still have some terms that are up for negotiation. Can you explain what this concept is and how I can maybe take advantage of it?

Holden: When you buy down the rate, you are paying a fee to get a lower interest rate, and that fee technically is prepaid interest. It makes a lot of sense when interest rates are high. When interest rates are this low, when you can get a 30-year fixed-rate mortgage for less than 3%, I'm not sure I really see much utility in buying the rate even lower. I definitely want to hear what Liz has to say about this. I think it's a present value of money situation. I would think that overall, if you have excess money when you're buying the house, that maybe it might be better to keep that in savings, especially at a time of economic turmoil like we're in, or doing something like spending the money on furniture or tools or a lawnmower or something.

Liz: Well, Holden when you said, if you have excess money, my immediate thought was, "You won't for long if you buy a house." Something will go wrong and will take up that money. But yeah, I have the same position that you do. I always had a little trouble making that math work because you have to decide how long you're going to be in the house. If you're going to pay down the rate, you want to stay in the house long enough for that to pay off. I have enough problems with figuring that out when we're doing a refi. I just don't think it's a great idea when rates are so low. So, if you wind up with something that's just fabulous, come and ask us about it. But otherwise, I'd say, no, just get the best rate you can. You're going to have great credit. You have a great income coming in. I think you'll get a good deal without having to buy down the rate.

Sean: OK. Because I was kind of debating it personally, because the rate that I was quoted that has yet to be totally locked in was a hair above 3%. And I was thinking, is it worth paying down just to get under that 3% threshold? And it seems like the answer is probably not.

Holden: Yeah. I mean, getting a below-3% might be something you can brag about at parties, but I don't know if it really makes a lot of sense in the long run. Let me explain a little bit more detail. Generally speaking, if you pay one point, which equals 1% of the loan amount, that will decrease your interest rate by a quarter of a percentage point. So let's say you're borrowing $200,000 and they quote you a 3% rate. Well, you might be able to pay $2,000, which is 1 point, to decrease the interest rate from 3% to 2.75%. Sometimes the math is a little bit different. Maybe a point will only buy the rate down an eighth of a percentage point, but that's the general rule of thumb. One point equals one quarter of a percentage point reduction in the interest rate.

Liz: I would just say a lot of people try to get the very bottom of interest rates. And again, I don't think it's worth sweating that too much. If you can get a decent deal and you can afford the payments, that's what you're shooting for. I wouldn't wait or try to time the market. It just never works.

Sean: Right. OK.

Holden: Never.

Sean: Thanks guys. Well, Holden, thank you so much for joining us. It's always a joy.

Holden: Hey, you're welcome.

Sean: And with that, let's get on to our takeaway tips, and I can kick us off here. First up, get ready, save up for a down payment and get your credit profile in the best shape possible before applying for a mortgage.

Liz: Next, set realistic expectations. Buying a house, especially in a competitive market, can take months to accomplish.

Sean: But be ready to act. Since the market is so competitive for buyers right now, prepare yourself to jump when the stars align.

Liz: And that's all we have for this episode. Do you have a money question of your own? Turn to the Nerds and call or text us your questions at 901-730-6373. That's 901-730-NERD. You can also email us at [email protected]. Also, visit nerdwallet.com/podcast for more information on this episode, and remember to subscribe, rate and review us wherever you're getting this podcast.

Sean: And here is our brief disclaimer thoughtfully crafted by NerdWallet's legal team. Your questions are answered by knowledgeable and talented finance writers, but we are not financial or investment advisors. This nerdy info is provided for general educational and entertainment purposes, and may not apply to your specific circumstances.