The current real estate market is definitely a seller’s market. Many homes, especially affordable homes, are flying off the shelves as soon as they hit the market. And, in many cases, sellers have multiple offers from which to choose. In times like these, buyers tend to make bad decisions because they just want to snag a house—any house—because supply is so limited. So, here are my Top 10 Tips for Buyers that will help you get into the best house for your situation, without breaking the bank.
1) Determine What You Can Afford and Start Saving for a Down Payment
The first step is to figure out how much a lender is likely to loan you for a mortgage, and also figure out how much you feel comfortable spending. Lenders look at your Debt to Income Ratio when determining how much they will lend. Most lenders want your total mortgage payment (which includes principal, interest, property taxes, and home owners insurance) to be less than or equal to 28% of your gross monthly income. They also want the total of all your debts (car payments, credit card payments, student loan payments, etc.) plus your new mortgage payment to be less than 36% of your gross monthly income. Some lenders will go higher though. Some will go as high as 50%. But, just because a lender will loan you that much money, doesn’t mean you need to or should spend that much money. It’s important to look at all your expenses and decide what you feel comfortable spending. If the bank is willing to lend you $400,000, but you’re not comfortable having a mortgage around $2000 a month, then set your budget lower. It’s a simple concept, but it’s one that many people overlook. Don’t put yourself in a situation where you’re “house poor”.
Once you’ve decided what you can afford, start saving for a down payment. How much should you save? Well, the ideal down payment is 20%. If you can put that much down, you can generally avoid the dreaded PMI (Private Mortgage Insurance). PMI is an insurance policy your lender takes out that will partially reimburse them if you default on your loan, and they make you pay the premiums. Basically, you’re throwing money down the drain. But, don’t feel like you MUST put down 20% in order to get into a home. Many lenders are willing to loan you money with much less. Some lenders have loans that allow you to put as little as 1% down. If you’re a Veteran, you may be able to qualify for a VA loan with 0% down. You may be surprised how little you really need. A great way to save for a down payment is to sock away any extra money that may come into your bank account—tax refunds, work bonuses, money from a second job, etc. Whatever you do, just start saving!
2) Check Your Credit & Pause Any New Credit Activity
Due to government legislation, you are entitled to receive a copy of your credit report from each of the three major credit bureaus (Equifax, Experian, and TransUnion) once a year. All you have to do is go to AnnualCreditReport.com and order them. These credit reports will not show you your credit score, but they will show you all current and past (within the past 7-10 years) financial activity. If you see any errors, dispute them immediately. These errors can significantly increase the interest rate you will pay, or can hurt your ability to get a mortgage all together.
Also, in the 3-6 months before you want to buy a house, don’t buy any new big ticket items or open any new credit cards. Your credit score takes a hit every time you take out a new loan or open a new credit card. Plus, remember how we talked about how all your debts (including the new mortgage you want to get) have to be less than the lender’s required percentage of your gross monthly income? Well, if you buy a car right before you’re planning to take out a new mortgage, that car will count against the amount the lender is willing to loan you. It’s best to wait until after you have bought your new house to buy other big ticket items.
3) Don’t Forget to Save for Closing Costs, and Other Expenses
Closing costs will generally be between 2-4% of your loan amount. Sometimes, these costs can be wrapped into your loan or you may be able to negotiate for the seller to pay some or all of these costs for you. But, sometimes that’s not the case. It’s best to have this money set aside (in addition to your down payment), just in case. If you are able to get the seller to pay for some of it, this money can go toward putting down a bigger down payment or can be used for repairs/improvements you want to do to the house after you move in.
Speaking of repairs and improvements, did I mention that homeownership can get expensive? When something breaks, there’s not a landlord you can call to fix it. You know that big, beautiful family room that made you fall in love with the house? You might want some furniture to go in it—unless you really like folding chairs. It’s best to have some money set aside to help you manage your house. Otherwise, your house will manage you.
4) Consider What Type of House You Want to Buy & Where You Want to Live
Do you want a condo, townhouse, or single-family house? Can you take care of a big yard or would you feel more comfortable with a small yard? What best fits your needs? And, depending on how long you plan to live in this house, will it fit your needs in the future? Are you planning to have kids in the next few years? If so, a one bedroom condo might not be the right house for you. Do you want to get a dog at some point? If so, you might want to focus your search on homes with bigger, fenced yards. Decide what house best fits your current and future needs.
Also, deciding where you want to live is just as important as what type of home to buy. Do you want to live in downtown, the suburbs, or in the middle of nowhere? Do you want to live in a quiet cul-de-sac or on a bustling street in a trendy part of town? What are the schools like in that area? What are the crime statistics? How long will your commute be if you move there? You may be able to get a bigger house if you move 45 minutes away from where you work, but are you willing to drive that distance every day, and can you afford the extra gas in addition to your new mortgage payment? It’s important to make sure you buy a house in an area where you feel comfortable, so ask yourself these questions and more before deciding where to start your search.
5) Find the Best Mortgage for You…and Do It Before You Start Shopping for Homes
Decide on the length of mortgage you want. Do you want a 30 year mortgage, 20 year mortgage, 15 year mortgage, or some other length? You will generally get better interest rates with shorter loans, but your payment will likely be higher because you’ll be paying the house off in a shorter time. Do you want an adjustable interest rate or a fixed rate? This decision should be based on current interest rates and how long you expect to stay in your current home, and it should be discussed with a trusted mortgage broker or loan officer. Another thing to discuss with them is whether or not paying points makes sense in your situation. Buying discount points basically means you are prepaying interest in order to secure a lower interest rate on your loan. This decision should also be based on how long you plan to stay in your home. Again, a mortgage broker or loan officer can help walk you through the pros and cons.
Speaking of lenders, check out several of them. Maybe one will be able to get you a lower interest rate than another, or won’t charge as much in closing costs. Shop around for your best deal! Shop for your loan before you start shopping for your dream home. There’s no point in looking at $500,000 homes if you only qualify for a $350,000 home. Once you start looking at $500,000 homes, the $350,000 aren’t going to look very good to you anymore. That’s why it’s best to start your home shopping after you know how much you are pre-approved for.
6) Get a Pre-Approval Letter
Once you’ve chosen which lender to go with and been pre-approved, it’s important to get a pre-approval letter from your lender. A pre-approval letter confirms to a seller that the lender is willing to loan you enough money to purchase the house. When you find your perfect home, you can include this letter with your offer. It lets the seller know that you’re serious and may give you the upper hand in a multiple offer situation.
7) Let Little Things Go
When looking at homes, decide what you can live without and what you can’t. Make a list of those must haves. As you go from house to house, you can check things off the list to make sure the house you’re looking at has those things. Many buyers have fallen in love with a house, only to realize once they move in that the house doesn’t have a linen closet or pantry. So, make a list of things that are important to you and check to make sure the home you decide on has those things. Don’t be too picky though. You need to be prepared to not sweat the small stuff. Things that can easily be changed, like paint colors or light fixtures, should not deter you from buying an otherwise great house. Let those things go. Also, be prepared to compromise if this is your first house. Very few starter homes have quartz countertops and hand-scraped wood floors. And, remember to look beyond the staging. All that furniture and décor goes with the seller. Focus on the layout of the home and make sure it will work for your needs.
8) Make a Strong Offer, but Don’t Go Too Far
Once you find your perfect house, decide what you feel comfortable offering for it. Make sure you offer what you can afford, and what you feel the home is worth. Your real estate agent can help you figure out the property’s value. If there are multiple offers on the property, you may be tempted to put in a high-priced offer in order to win, but that’s not always necessary. Sometimes a pre-approval letter from your lender, or a personal letter to the seller can help your offer stand out from the others, and may actually help you win even though you didn’t offer the most for the house. The key with multiple offer situations is to not let your emotions take over. Stay within your budget, so you don’t end up with a mortgage you can’t afford.
9) Get a Home Inspection, but Realize It Has Its Limits
Insist on having a home inspection of the property done. You’ll have to pay several hundred dollars for it, but it’s better to pay a little bit of money now to avoid costly repairs later. A home inspection can notify you of problems you may not have noticed or even thought to check while walking the property. When problems are found, they can many times be used to negotiate a better price for the home, or the seller can agree to make the needed repairs to the home before the sale is final. But, remember that every home inspection has its limits. Inspectors can’t open up walls and remove flooring to check for problems possibly lying beneath the surface. Also, home inspections generally don’t test for mold, radon, and pests. So, you may want to consider ordering those tests in addition to a home inspection.
10) Get a Copy of the CC&Rs and HOA documents
If you would like to run a small business out of your home, you need to make sure the CC&Rs (or rules of the neighborhood) allow you to do that. It would be horrible to buy a home only to find out that you no longer have a livelihood to pay for that home because you can’t operate your small business out of it. Or, you don’t want to buy a lot on which to build a large two-story home, only to find out that the CC&Rs prohibit two-story homes from being built in that neighborhood. When looking over CC&Rs, you’ll also want to think long term. If you eventually want to rent this house out, will the CC&Rs/HOA rules allow you to do that? Many planned communities have rental caps, so you’ll want to take that into consideration.
Bonus Tip: Hire a Realtor to Help
Now, I know what you’re saying—she’s a Realtor, so of course she’s going to say that. But, it really is the truth. A good agent can and will walk you through the complicated process of buying a home. It’s likely the largest investment you’ve made in your life to date, so why not have someone by your side, watching out for your best interests. There are many bumps you’ll experience throughout the real estate process, so you’ll want an agent who is skilled, motivated, and knowledgeable about the area where you are wanting to buy. The best part about having a buyer’s agent is that it will likely cost you nothing out of pocket. Sellers usually offer to pay commission to a buyer’s agent out of their proceeds from the sale. So, you get someone representing your best interests, while someone else pays for it. Does it get any better than that?
For more information, or to ask questions, contact Lindsay Storrs at (385) 269-9720.