How First-Time Homebuyers in Kentucky Can Compete In a Strong Seller’s Market

The housing market in Kentucky is creeping back to life as COVID-19 related restrictions across the state ease up. The June 2020 edition of the HousingIQ Survey, conducted by Kentucky REALTORS®, shows that a greater number of buyers are returning to the market and they’re not expecting lower prices.

In fact, Vidur Dhanda, author of the survey, said, “Home prices will be pushed higher as investors and consumers compete in a low inventory environment made tighter by reluctant sellers.” Despite home sales being down in May by 23% from last year, the average sale price in Kentucky has risen 4% from April of 2019 to April of 2020, according to the Northern Kentucky Tribune.

As a first-time homebuyer, you can achieve your dream of homeownership even in Kentucky’s high priced, low inventory market if you understand how to make your offer as appealing as possible to sellers.

Let’s face it, cash is king, and in a seller’s market, knowing your financial limits before you begin your home search is imperative. Having this knowledge will ensure that you’re making strong offers when the time comes, and knowing your max purchase price straight out of the gate will help you avoid overextending yourself if you wind up in a bidding war.

• Get Pre-Qualified: Getting pre-approved for a mortgage will save you from the heartache of falling in love with a home you thought you could afford and finding out later that when you factor in the monthly payments, insurance, and taxes the home is really out of your price range. Pre-approval will also give sellers confidence in your offer, knowing you’ve already secured financing.To pre-qualify for a loan your lender will walk you through the lending process as though you’ve already found the home of your dreams. They’ll check your credit scores, income, and debt-to-income ratios. Many lenders will even include closing costs, insurance, taxes, and other expenses associated with homeownership to give a true measure of what you can afford.The information you gain from the pre-qualification process will help you and your REALTOR® make reasonable choices when you start looking at homes.
• FHA Loans: FHA loans are a great option for first-time homebuyers who have not saved enough for a large down payment. These loans are insured by the Federal Housing Administration. You can finance a home through the FHA with a down payment as low as 3.5%.You will have to meet specific criteria to qualify for an FHA loan, including a FICO score of 500-579 if you can put 10% down (higher if you’re putting only 3.5% down), the purchase of Mortgage Insurance Premium, a debt-to-income ratio less than 43%, and steady income, among other things.
• Down Payment Assistance: If you are struggling to come up with a sizable down payment, Kentucky offers a variety of FHA grants designed to help. One such program is the Covington Homebuyer Assistance Program. Buyers can receive up to $5,000 in the form of a zero-interest, deferred, or forgivable loan. A more complete list of similar programs and their specific eligibility requirements can be found on the FHA’s website.

Once you know what you can afford, there are other ways to make your offer more appealing to buyers and many don’t include more money.

• Avoid contingencies: One of the benefits of buying a house as a first-time homebuyer is that your purchase isn’t contingent on the sale of your current home You can keep the momentum going in this area by removing other traditional hiccups that come along with the closing process.While you should require an inspection, your offer will have more appeal if you aren’t asking the seller to fix every small problem that pops up. While it may be commonplace to ask the seller to cover closing costs, in a seller’s market like Kentucky’s, your offer will be more effective if your financing plans take into consideration the cost of closing.
• Consider appraisal gap coverage: Appraisal gap coverage gives you and the buyer peace of mind if the property appraises below the amount you’ve offered, and is appropriate to consider only when you’re making an offer over the list price. The article 7 Ways to Get Your Offer Accepted in a Hot Market notes that when this happens, “you would either fork over [additional cash] to make the deal happen, convince the seller to accept a new [lower] purchase price […], or walk away from the deal.” Most sellers are afraid you’ll walk away, and they’ll view appraisal gap coverage as a guarantee the deal won’t fall through if it appraises below your offer.
• Include escalation clauses: In a hot market, having an escalation clause can show the buyer you mean business, but also protect you from getting swept up in a bidding war.Here’s how an escalation clause might work in a multiple offer situation: You put a bid in on a house for $100,000 with an escalation up to $115,000. That means if there are no other offers, you’ll get the house for $100,000. But say the seller receives an offer of $110,000, your escalation clause would be exercised and would automatically change your offer to $111,000. If the other potential buyer walks away, the house is yours for $111,000. If the bidding continues, your escalation clause continues to be used in increments of $1,000 but not to exceed $115,000.This keeps you in the running for the home of your dreams, but sets a firm cap on how high you’re willing to go. Keep in mind that this type of clause can be confusing to people. Clean and simple offers are typically better received. Your REALTOR® can help you decide if an escalation clause is appropriate for your situation.
• Offer flexible closing conditions: The easier you make closing for the seller, the more appealing your offer will seem. Some buyers will choose convenience over money (to a certain point) so when you can’t offer more cash, offer convenience.One way to do that is to shorten your inspection period. Many contracts have a 10-day inspection period, so offering a shorter window (say 3-5 days) will appeal to a seller who is eager to move on.
  Another way to provide convenience in lieu of cash is to be flexible with your closing date. For first-time homebuyers who aren’t coordinating the sale of another property as well, being flexible in this area is a big opportunity to stand out. REALTOR® Trenton Hogg says in the