How you can prevent buyer’s remorse

By Michele Lerner,

After three years of searching for a home in their preferred neighborhood in Silver Spring, Md., Chris Lancette and Won-ok Kim made an offer on a house in a different neighborhood.

“The moment we turned in the offer, as nice as the house was, I literally started sobbing,” said Lancette, 52-year-old owner of Orion’s Attic, an estate-liquidation company. “Won-ok was depressed, too, but we had put our agent, the lender and the seller’s agent through all that work, and we felt it was too late to back out.”

Lancette and Kim were thrilled when they were outbid for that house. Their agent, Carolyn Sappenfield with Re/Max Realty Services in Bethesda, Md., told them afterward that they should never make an offer on a house they don’t love.

While Lancette and Kim eventually bought their dream home, in their preferred neighborhood, many buyers in today’s crazy real estate market regret their decision.

A recent survey by Bankrate, a financial services company, found that about a third of baby boomer buyers (ages 57 to 75) regretted their decision. According to the survey, 64 percent of millennial home buyers (ages 25 to 40) have at least some regrets about their purchase.

[How buyers with uneven income can qualify for a home mortgage ]

The main reason for buyer’s remorse: money. Home buyers in the survey reported being unprepared for maintenance and other costs associated with owning a home. Some said they paid too much and the mortgage rate was too high. Dissatisfaction with the property was another source of regret. About 30 percent of millennial buyers were unhappy with the size of the home, about 15 percent with its location.

“It’s the Wild West out there, and even though it may calm down a little when more inventory comes on the market, the heated market will likely be ongoing until we make up for years of housing shortages,” said Mark Ackermann, principal broker and manager for Weichert, Realtors in Alexandria, Va. “Every buyer needs to be prepared to make a solid offer and to pivot to make a counteroffer to succeed in this market.”

For some prospective buyers, the first decision should be whether to buy at all.

“Regardless of the market and mortgage rates, you should be certain that you will stay five to seven years or longer in your home before you buy because of the high cost to get in and out of a home,” said Isabel Barrow, director of financial planning for Edelman Financial Engines in Alexandria. “For some people, it may make sense to rent and wait until they can build up a bigger down payment [or] increase their income or for more homes to come on the market.”

Devise a financial plan

Although the frenzied pace of the housing market puts pressure on buyers, Sappenfield said, they should avoid rushing.

“Before you do anything, you need to talk to a good local lender who will work through the entire preapproval process with you,” Sappenfield said. “You need a fully documented loan, not just an estimate of your income and debt.”

Lancette and Kim initially talked with a loan officer who would consider only the income from Kim’s D.C. government job when setting the loan limit. The lending company, which is not local, would not consider Lancette’s income because he is self-employed. Sappenfield recommended a local lender.

“The new lender used our tax returns to qualify us for a larger loan amount based on both of our incomes, which was critical to our being able to purchase our house,” Lancette said.

The couple spent well above their initial budget to buy, for about $775,000, a newly renovated house in their preferred neighborhood near Sligo Creek. The 3,500-square-foot house has a swimming pool and room for a garden and entertaining.

Kim’s parents plan to move into the in-law suite on the lower level of the house and pay rent, which will make the mortgage more affordable. “We could have paid a lot for something that fell short of what we need and needed work, but we chose to stretch and pay more for a place that’s in the neighborhood we want and has even more than we expected we would be able to find,” said Kim, 50.

Another of Sappenfield’s clients, a Maryland teacher in her 50s, wasn’t certain that she could qualify for a mortgage until she met with a lender. She had been saving diligently, and she was eligible for state or local first-time-buyer assistance that helped her become a homeowner.

Renters who are not sure whether they have the wherewithal to buy may want to consult a lender to determine their ability to borrow.

“One woman who wanted to buy came to me with a 520 FICO credit score and $4,000 in savings,” said Jeffrey Nelson, a loan officer with Embrace Home Loans in Middletown, R.I. “I counseled her on how she could improve her finances and credit, and a year later, she has $20,000 saved, a 715 FICO score and qualifies for down payment assistance of $15,000.” (The best mortgage rates are generally available to borrowers with a FICO Score of 760 or more, according to MyFICO.com.)

[Two new ways to save for a home purchase]

A big problem for many buyers is not understanding the difference between eligibility and affordability, Nelson said.

“A lender qualifies you based on several factors, including your debt-to-income ratio,” Nelson said. “That compares your gross monthly income with the minimum payment on recurring debt that shows up on your credit report, such as a car payment, credit card debt and student loans. But that doesn’t include all your expenses, such as your cellphone, utilities, car insurance and groceries, which should all be part of your budget.”

Depending on the loan program, debt-to-income can be as much as 43 percent and sometimes above 50 percent, Nelson said.

“You need a full visual of your expenses and your lifestyle,” Nelson said, “and to consider if there’s anything you can cut out of your budget so you can comfortably afford to buy.”

A rental payment provides an incomplete comparison with a mortgage.

“Some renters think they can estimate the affordability of a mortgage payment based on what they pay for rent, but that doesn’t factor in the full extent of your housing payment,” said Barrow, of Edelman Financial Engines. “Your housing payment when you buy includes the principal and interest on your loan, plus property taxes and homeowner’s insurance. For example, if your [loan’s] principal and interest is $1,000, your taxes and insurance are likely to be another $200 per month.”

Homeowners often need to budget for homeowner association dues and for landscaping and maintenance costs, Barrow said. And utility bills, she said, could be more than when they were renting.

Nelson, of Embrace Home Loans, remarked, “Many buyers focus on saving 3.5 percent of the home price for a down payment, but they neglect to save the 2 to 6 percent they need for closing costs and for an emergency fund.”

Barrow recommended that buyers make a 20 percent down payment to avoid paying private mortgage insurance, which lenders require for loans with a lower down payment. “It’s important to have a cushion of equity in case you have to move unexpectedly,” Barrow said. “You don’t want to have to pay off your mortgage with your savings if you have to sell in a possible market downturn.”

To do and not to do

Some tips on avoiding buyer’s remorse:

● Make a plan you can afford. “To avoid buyer’s remorse, you need to develop a plan based on what’s most important to you, such as a neighborhood or a school district,” Barrow said. “Don’t get caught up in the emotional component of buying a home or make a sudden decision that doesn’t fit your budget or your short- and long-term financial plans.”

It’s also important to understand the market.

“Buyers need an agent who can help them understand home values,” said Ackermann, of Weichert. “For example, if a house you’re considering is similar to homes that have recently sold for $480,000, then a listing price of $500,000 is reasonable, and you should anticipate that it may sell for 10 to 20 percent more than they’re asking.”

Buyers frustrated by what they’re finding on the housing market sometimes increase their price range, but experts warn that could be something they’ll regret later.

● Stretch your budget carefully. Many homes sell today for more than the asking price, so be prepared to consider increasing the offer. Buyers need to know where the breaking point is for their budget, Nelson said. He said that increasing an offer from $400,000 to $425,000, for instance, would add about $100 to the monthly payment, fine for some buyers but not others.

“It’s easy to get caught up in the emotion of buying a home and get into a bidding war, but buyers need to be very clear about how much they can comfortably afford,” Barrow said. “If you know that $700,000 is your limit, then you need to look at homes in the $600,000 to $650,000 range so you have room to compete in a bidding war.”

Sappenfield, of Re/Max, suggested looking at homes that are 10 percent to 20 percent below your price range to build in room for a bidding war.

● Understand what it means to waive contingencies. Buyers in a bidding war will sometimes waive contingencies that protect their interests. It’s a move that puts their deposit at risk.

“Buyers need to understand that once they waive their home inspection, financing and appraisal contingencies, there’s no way out of the contract without losing their deposit,” Ackermann said. (One possible exception, he said, might present itself if the property was in a community with a homeowners association and the buyer found something to dispute in the HOA documents.)

Buyers do have options. For instance, some will pay to have the property inspected before they make an offer, which reduces the risk of waiving the home inspection contingency, an approach that Sappenfield endorsed.

[Competitive home buyers waive contingencies to score homes in tight market]

Ackermann also said waiving an inspection may be a little less risky with a home built recently than with one that is 40 years old. Either way, buyers should be prepared to pay for repairs after the purchase.

● Be prepared for an appraisal gap. An experienced agent can help buyers estimate the current market value of a property, but bidding wars sometimes drive offers above the appraised value. Buyers can waive the right to withdraw an offer if the property is appraised for less than the contract price, but lenders will require an appraisal and lend only as much as the appraised value minus the down payment. Buyers who waive the appraisal contingency surrender the right to negotiate the price of the sale, so they must pay out of pocket the difference between appraisal and contract price or lose the deposit.

“Some buyers have the misconception that the bank will loan them enough money even if the house appraises for less than their offer,” Sappenfield said. “Buyers need to realize that if they waived the appraisal contingency, then they’re required to come up with the full price no matter how much they can borrow.”

● Lower your expectations. If you can’t find something you can afford and don’t want to jeopardize your financial security, you may have to consider moving farther from a city, looking at smaller homes or switching from a stand-alone single-family house to a townhouse, Ackermann said.

“You may want to consider a house that needs some cosmetic work if it’s in the right location,” said Nelson, of Embrace Home Loans. “You may face less competition, and you might be able to negotiate more on the price. You just have to accept that you may need to wait to fix it up the way you want.”

You can also consider financing home improvements with a mortgage that wraps renovation costs into your 30-year loan, he said.

Be realistic about renovation costs,” Sappenfield said. “I try to provide good estimates for buyers so they understand the potential expenses they face.”

●Be patient. Lancette and Kim realized that a location within walking distance of Sligo Creek was a critical factor for them. Even though it took years to find the right house, they have what they want now.

“You have to stay optimistic and strong to be a home buyer today,” Kim said. “We kept looking every day and every night and had a clear vision of what we wanted and eventually we found it.”

While the frenzied market makes buyers feel that they have to rush, Nelson counseled that it’s better to take your time if you want to avoid buyer’s remorse.

“Your home should be an asset, not a liability in your life,” Nelson said.