As the events of the last few years in the real estate industry show, people forget about the tremendous financial responsibility of purchasing a home at their peril. Here are a few tips for dealing with the dollar signs so that you can take down that “for sale” sign on your new home.
1. Improve your creditworthiness
Your credit profile is important to a lender. While you’re preparing to buy a home, be sure you’re responsibly managing your current debt. Always pay your bills on time and chip away at your outstanding balances by paying more than the minimum. In most cases, lenders like to see a borrower with a debt-to-income ratio of 36% or less.
You also should keep your credit used vs credit available ratio under 30%. For example, if you have a credit limit of $5,000 you should only charge up to $1,500 per month on credit. The better your credit score is the lower the interest rate you can qualify for which will save you thousands of dollars over the life of your mortgage.
2. Save for a down payment
Ideally, you should aim for a 20% down payment on your house. Most lenders will require at least 3% down and the FHA will require 3.5% down. When you place a down payment that’s less than 20% you’ll likely be required to carry mortgage insurance which adds extra costs to your mortgage payment. Talk with your lender and verify the terms and fees.
In order to save for a down payment you should analyze your current spending habits and look for wasteful expenses that you can cut back. These will be quick wins that help you start stashing away money easily by giving up, but you should also consider other expenses to give up like entertainment, eating out, etc. that could save you additional money faster.
3. Get pre-approved
Sub-primes may be history, but you’ll probably still be shown homes you can’t actually afford. By getting pre-approved as a buyer, you can save yourself the grief of looking at houses you can’t afford. You can also put yourself in a better position to make a serious offer when you do find the right house.
Unlike pre-qualification, which is based on a cursory review of your finances, pre-approval from a lender is based on your actual income, debt and credit history. By doing a thorough analysis of your actual spending power, you’ll be less likely to get in over your head. Usually you can expect to be approved for a house that is up to 3 times your annual gross income ($60,000 salary = $180,000 home).
To get pre-approved, reach out to your mortgage broker or local lender and they’ll be able to assist you. If you’re not sure of who to contact, then start off by asking your real estate agent as they likely have well trusted contacts they can refer you to since they’ve worked with plenty of buyer clients during their career.
4. Choose your mortgage carefully
Before the credit card and student loan debt crisis, home owners used to put emphasis on paying off their mortgages as soon as possible. Many home owners elected to get a 15 year mortgage as a result. In today’s world, things are different as many home buyers are straddled by student loans or credit card debt. It’s best to get a 30 year mortgage to have a lower monthly payment than the 15 year mortgage so that you can allocate more of your money towards paying off your debts with higher interest rates.
If you have no debt besides your mortgage, still opt for the 30 year but make extra payments each year to reduce the principal faster and pay it off in less than 30 years if that’s your goal.
Additionally, when picking a mortgage, you usually have the option of paying additional points (a portion of the interest that you pay at closing) in exchange for a lower interest rate. If you plan to stay in the house for a long time—and given the current real estate market, you should—taking the points will save you money.
5. Do your homework before making an offer
Before you make an offer on a home, do some research on the sales trends of similar homes in the neighborhood with sites like Zillow. Consider especially sales of similar homes in the last three months. For instance, if homes have recently sold for 5 percent less than the asking price, your opening bid should probably be about 8 to 10 percent lower than what the seller is asking.
Your real estate agent can also supply you with data showing you what sales trends have been for similar homes recently. If you’re ready to begin searching for a house for sale in Elkhart, Indiana or the surrounding cities (Granger, South Bend, Mishawaka, etc.) then let’s get in touch as I’d love to represent you as your buyer’s agent.
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Looking forward to assisting you,
Elkhart Real Estate Agent – RE/MAX Excellence
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