Cue Michael Buffer yelling, “Are you ready? Let’s get ready to rumble!”
Buffer’s is a fitting soundtrack for the homebuyer in a seller’s market, trying to prevail in catching the seller’s attention. The better equipped with knowledge you are, the better your offer will look to the current owner of what you long to possess: the home of your dreams.
Let’s take a look at a few ways to get prepared to purchase a house.
Check Your Credit
The highest credit scores garner the lowest down payment requirements and lower house payments. Homebuyers with scores under 620 will find it a challenge to obtain financing and, if they do, they’ll pay a higher rate.
You are entitled to a free copy of your credit report once a year. Make sure you order the reports at AnnualCreditReport.com, the only site authorized by the federal government.
When you get your reports, either online or in the mail, go over them, looking for mistakes or anything else you can challenge. It is not at all unusual to move your score up dramatically by disputing and having the agency remove even one negative entry from your credit report.
Pay Your Bills
Lenders determine how much they will loan by using what is known as a debt-to-income ratio (DTI). To determine where you are right now, add up all your monthly payments, including auto loans, credit card payments and any other debt. Don’t forget to add in your current mortgage or rent payment.
Divide the sum of your monthly debt payments by your monthly gross (before tax) income and then multiply that result by 100. This is your DTI, expressed as a percent.
What is considered an acceptable DTI varies by lender, but they typically want to see it no higher than 36 percent.
If you find that your DTI is on the high side, pay off some bills or increase the amount you pay each month to bring down the balances. Also, don’t take on new debt as this will negatively impact both your DTI and, possibly, your credit score.
Save Your Money
Loans from the Veterans Administration and USDA have no down payment requirements. FHA, on the other hand, requires 3.5 percent of the purchase price as a down payment, unless your credit score is between 500 and 579, in which case expect to put 10 percent down.
For a conventional loan, you’ll need at least 20 percent of the purchase price as a down payment on the house. Again, more is better – the more cash you put down, the better the interest rate. The amount of the down payment may also determine whether or not you’ll have to pay for private mortgage insurance.
Don’t forget about closing costs as you save – those are all those fees that can pack quite a wallop at the closing table. Some of the fees are negotiable, and the total varies. Use 3 to 4 percent of the loan amount as a ballpark figure.
Arrange Your Financing
In many parts of the country investors are snatching up any house that’s in decent condition and reasonably priced. Because they typically offer cash, their offers are the cream of the crop to home sellers looking for a clean transaction and a quick close.
Investor offers are mighty hard to compete against – especially if you go into the process unprepared.
When you look over a standard purchase agreement you’ll notice a section regarding financing. It will typically state that the buyer has so many days to obtain a mortgage at specified rates and terms. If the buyer hasn’t been pre-approved by a lender for a mortgage, there is always a chance that he won’t qualify for a loan.
A savvy home seller knows this. Faced with multiple offers on his home, he isn’t about to go under contract with a buyer who is a gamble.
Rule number one, then, when considering the purchase of a home, is to see a lender to get your mortgage preapproved. No, this doesn’t put you ahead of an investor with cash, but it puts you in front of other buyers who don’t have their financing arranged.
Make up Your Mind
As you get closer to finalizing the first steps toward buying a home, it’s time to determine just what it is you want. One story or two? Condo or single-family home? Urban or rural? Determine how many bedrooms and bathrooms you simply must have and any other features that you can’t live without.
Hire a Real Estate Agent
There is absolutely no reason to not hire an agent when purchasing a home. The commission is paid by the seller at the close of escrow, so the services cost you nothing. Not a bad price to pay for expert representation by someone who is legally required to protect your interests.
A good real estate agent is, overall, available to show you homes at your convenience. He or she is also familiar with the areas you’ve chosen for your house hunt. The right agent will follow your wish list to the letter, not wasting your time showing you homes that don’t fit your criteria.
Congratulations on your decision to buy a home.