Buyer's Guide

Preparing to Buy a House

It’s no secret that the U.S. real estate market is has its ups and down. But unfortunately for buyers, home prices have been on the rise the last few years and it doesn’t look like they are coming down any time soon. High listing prices make it difficult for buyers to save for a down payment, and first-time buyers are struggling to climb the housing ladder.

Most lenders recommend a 20% down payment. That with mortgage rates increasing, closing costs, moving fees, and all the new things needed for a new house, not everyone can afford a home right now.

According to the National Association of Realtors (NAR), first-time buyers make up 26% of real estate purchases. And if you are a first time homebuyer you may need some tips to make your home buying dreams a reality.

It’s important to take time to prepare yourself and your finances before you make a home purchase. You’ll need money for a down payment, closing costs, and monthly mortgage payments. It’s better to be prepared than to go in blind.

Build and Maintain Your Credit Score

Your credit score is one of the main things a mortgage lender will look at when deciding if they should lend to you. So try to get any debt you have paid down and make sure you make all of your monthly payments on time. They will pull a credit report to see where you currently stand before offering you conventional loans.

Higher credit scores offer lower rates from a mortgage lender on your home loan. According to Experian, lenders require buyers to hold a credit score of at least 620 to qualify for a mortgage. However, most experts agree that to get competitive rates on your loan, your credit score should be at least 740.

If you have a lower credit score, one of the best tips for first time home buyers is to hold off on purchasing until you can build up your score.

Avoid Large Purchases Right Before Buying

Hold off on big credit splurges while going through the home buying process. The two big reasons are your credit score and debt-to-income ratio.

Opening a new credit account or getting approved for a new loan will drop your credit score. This can make it hard to get a conventional loan. Even hard inquiries can cause a temporary dip in your credit rating.

Be sure to also review your current credit card balances to ensure you are able to pay them off quickly without incurring fees.

However, the biggest issue is your debt-to-income ratio. Your debt-to-income ratio is one of the most significant factors in determining whether you qualify for a loan. Currently, the U.S. government advises buyers to have a debt-to-income ratio of 45% or lower to qualify. Different mortgage products vary, though. For example, Fannie Mae mortgages mandate a debt-to-income ratio of no higher than 36% to qualify.

Save for a Down Payment

To keep your monthly mortgage payment low, a good real estate agent will recommend a strong down payment for the house you purchase. Having money to put down upfront also shows sellers that you’re serious and prepared to buy a home, lowering the likelihood of the deal falling through. If you’re able to, putting down 20% of the home’s purchase price will prevent you from needing Private Mortgage Insurance (PMI), but you’re allowed to put down whatever amount you feel comfortable with.

Review Your Spending

Saving for a down payment is usually the biggest hurdle you’ll need to overcome. The higher your down payment, the better your rates and lower your monthly payments.

Go over your household expenses to figure out how much you can save. Then, if you’re struggling to save, think about where you can make cuts. Saving faster will ultimately help you achieve your dream of homeownership faster.

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Real Estate Market Trends

Research the Home Buying Market in Your Area

Most real estate news focuses on the big picture. The national viewpoint offers just a fraction of the whole story. Even looking at state real estate news won’t tell you everything.

To find out the truth about a local real estate market, you need to focus on that area. While some areas of the country have experienced unprecedented growth, others have seen price drops even with a hot market.

Looking into the home-buying market at the local level also offers targeted information on home buyer grants and other forms of financial assistance. For example, you could qualify for cheaper loans if you purchase a home within a designated rural or suburban area (according to the U.S. Department of Agriculture).

Local real estate agents are great resources for area specific knowledge. They can help you figure out what you need for a down payment in the area, what to expect for closing costs and mortgage payments, how to obtain a home inspection, and where to find mortgage lenders.

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Home Loans & Mortgages

Get Pre-Approved for a Home Loan

Getting pre-approved not only looks good to home sellers it also lets you know how much home you can afford. This means you can focus on looking at homes that are realistic for your budget and lets the seller know you are ready and able to buy.

How Much Can You Afford?

Real estate experts advise potential homeowners to first get pre-approved and never buy a house you can’t afford.

Use the 28/36 rule to determine how much financing you can qualify for. According to the rule, your potential mortgage payment shouldn’t exceed more than 28% of your pre-tax income or 36% of your total debt.

Monthly payments vary greatly based on your down payment and interest rate. But you also will have to cover closing costs which can add up quickly.

Check Out Your Mortgage Options

Shopping around is critical to getting the best deal on an interest rate. The same principle applies to getting pre-approved before starting your home-hunting adventure.

There are also many types of loans.

• Conventional loans
• Jumbo loan
• Government-backed loan (Federal Housing Administration or FHA loans, VA loans, etc.)
• Fixed-rate mortgage
• Adjustable-rate mortgage

Figure out which mortgage options you can qualify for based on your circumstances. For example, if you’re a veteran, active service member, or widowed spouse, you can qualify for ultra-cheap VA loans.

Compare Lenders

Once you’ve determined which mortgage products you can get pre-approved for, it’s time to compare lenders. Hundreds of lenders are available, making comparison websites essential in creating a shortlist.

By entering some basic details, you can find out which lenders offer the best deals for you.

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Deciding Where to Live

When deciding where to live in your area, you could have a lot of options depending on your wants and needs. Start by asking your self some questions:

Is it important to live in proximity to something like work, school, or family? How far is too far?

Is it important to be in a specific school district or county?

Is it important to be near certain amenities (grocery stores, gas stations, parks, etc.)?

Do I prefer to live in a more urban, suburban or rural setting?

Once you’ve narrowed your search down to a few zip codes, towns or neighborhoods, you can move on to the actual property.

What Features Do You Want in a House?

Knowing what you want is important when buying a home. Whether you are purchasing a home alone or with others, it’s good to talk through exactly what you’re looking for. Having a list of deal breakers and things you will bend a little on is also good. This will save you from wasting time on a home purchase that just won’t work for you.

Often times you may have to compromise on a few wants in order to find a home in a timely fashion. Refusing to budge could mean spending longer than you expected narrowing down homes or not finding a home at all.

Remember, there are things about a house that can be changed. These things include wall colors, fixtures, flooring, additions, updates, sometimes even layout and square footage. Some of the things that can’t be changed are, location, lot size and neighbors.

If your top priority is finding a home, decide what things you can compromise on and what is absolutely not negotiable. One of the best home buyer tips is to be flexible wherever possible.

Attend Open Houses and Home Tours

Online real estate listings can only tell you so much about a home. Nothing beats attending an open house to see a property for yourself. It’s also a chance to ask questions and learn more about a potential home.

Walking through a house will help you see how the home feels inside and if you can see yourself living there. Sometimes real estate agents will recommend going to open houses before you are ready to start your search to help get an idea of what you’re looking for.

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Find a Buying Agent

To make the process the best it can be, it’s essential you have an agent who meets your needs. You may want an agent that is always available for questions, constantly on the lookout for the right home, or great at getting you to see the big picture. Whatever it is, make sure the agent you choose has it.

Interview Multiple Real Estate Agents

If this is your first time buying a house you may think all Realtors are the same. The truth is that real estate agents’ skills, commitment, and abilities vary wildly. Think about the process and what you think is important to you in an agent, then write those things down. Next look through real estate agent directories and find some that know and have made sales in your specific area. Set up interviews with at least a few agents off your list that stand out.

After you’ve spoken with a few you will realize just how different one real estate agent can be from another. This may help to add more to your list of wants. If you think you’ve found one that can help you find your dream home, hire them! Otherwise, continue interviewing until you do.

Be Sure the Real Estate Agent You Choose is Skilled at Negotiating

If you’re in a situation where you are competing against multiple other bids, you want a real estate agent who can make you stand out among the rest and get you the house. These agents know the market and how to use it to their client’s advantage. That’s who you want on your side.

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Making an Offer & Negotiating

Once you find a house you are ready to commit to, it’s time to write an offer. This is when all the knowledge and experience of your real estate agent can be crucial. You want to put together an offer than appeals to the seller but also fits within your comfort zone.

In simple terms, an offer should consider what the home is worth and what you can afford. But also remember those home sellers are real people. So think about doing some extra research to find out what is important to the seller and work that into the offer.

Should You Offer Below the Asking Price?

Deciding how much to bid really depends on the local market and the condition of the house. If the home is priced fairly for the area and the market is competitive, bidding below asking will likely not get you the home.

Bidding in Hot Markets

In hot markets, where there are more people in the market to buy than there are homes for sale, a good real estate agent will direct you to offer over the asking price. This shows the seller that you are serious about buying the property.

Bidding in Cooler Markets

In calmer local markets, making an offer slightly below the asking price is usually a smart place to start. Starting low gives you more room for maneuvering, but it could also mean losing out to a competitor or insulting the seller if they feel their price is more than fair. In the U.S., a true lowball offer is considered 20% or lower.

Lowball offers are only recommended if the seller has overpriced their home or there are serious issues you’ll need to rectify post-sale. Keep in mind that even if you think the home is overpriced and the comps prove it, the seller may not. They can still reject your offer.

Determining a bid is the most contentious aspect of any home buying guide. You want to be sure you can afford the down payment and closing costs, whatever your bid may be. The best way to resolve the issue is to speak to a local real estate expert.

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Home Inspection

A home inspection gives the buyer a chance to look at all aspects of the home to see what might need to be fixed or replaced. This ensures that the buyer is offering a price to buy something that they have a good idea of the value.

In a competitive market it could be tempting to skip the home inspection. Even if you are required to waive the inspection
contingency to have a competitive offer, get an inspection for informational purposes.

Don’t Avoid the Home Inspection

Unless you are experienced in home maintenance and repair, many issues can evade your notice. However, if the issue is big enough, it may make you change your offer. So whether you do a pre-inspection, inspection contingency, or inspection after purchase, it is important to know what you’re getting into.

Caveat Emptor vs. Caveat Venditor

Caveat emptor means, “Let the buyer beware.” In other words, the onus is on the buyer to perform a home inspection, and if any defects are discovered after completing the purchase, the buyer is out of luck.

Today, most states no longer apply caveat emptor, which protects buyers engaging in real estate transactions. State courts that continue to apply caveat emptor include:

• Alabama
• Arkansas
• Georgia
• North Dakota
• Virginia
• Wyoming

The legal situation has changed in most states. Today, most states operate under the caveat venditor principle, meaning “let the seller beware.” Since sellers are more likely to know the condition of a property better than the buyer, caveat venditor principles protect buyers if they discover major post-sale problems.

Does this remove the need to employ a home inspector? No, experts still state that one of the most critical home buying tips is to employ an inspector.

Exercising a caveat venditor can still lead to stress, legal costs, and no guarantee of a court ruling in your favor. Enlisting a trustworthy home inspector from the beginning enables your transaction to proceed smoothly.

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Home Renovations & Repairs

There are a few things in a house that cannot be changed. These are things like location, lot size, neighbors and neighborhood. Otherwise, if your budget (and the HOA) allows most things can be altered to your preference. This is important to keep in mind as finding a place that is exactly what you want as-is is usually very challenging.

Factor in All Your Costs

The cost of purchasing the home itself is just the beginning. You also need to consider origination costs, the potential for interest rate increases in the future, and any renovations you intend to carry out to create your perfect home.

Go over the numbers to determine whether you have the funds to carry out your plans. One of the biggest things first-time buyers need to correct is basing their calculations on future salary increases or interest rate decreases.

Base your affordability calculations on the here and now because your finances can change instantly.

Think Long-Term Solutions

Transforming an existing property takes longer than you think. Consider how much time and effort it could take to make the changes you want.

Generally, most experts agree you’re better off renting if you plan on living in a home for less than five years. High mortgage and renovation costs make this investment a losing bet if you’re not planning to stay somewhere longer.

Factoring in the long-term means considering any changes you want to make and aspects such as career and family.

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