Here’s what to do before buying a house in this hot real estate market
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Finding a new home can seem like a daunting task these days.
Prices are up, inventories are low, and mortgage rates are rising.
Therefore, in this environment, it pays to do your homework before entering the market. Once you start searching, you’ll need to move at the speed of light to place an offer, says Jessica Lautz, vice president of demographics and behavioral insights for the National Association of Realtors.
“As interest rates climb, there has been a rush to lower relative rates, while at the same time the stock of homes has reached historic lows,” she said.
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The median price of a home in January jumped to $350,300, a 15.4% increase from January 2021, according to the National Association of Realtors. Homes spend an average of 19 days on the market.
Meanwhile, the mortgage rate for a 30-year fixed loan is 4.17%, according to Mortgage Daily News. At the beginning of last year, they were below 3%.
With that in mind, here’s what you can do now to put yourself in the best position to find your new home.
Learn the language
Getting familiar with real estate jargon, like closing costs and home inspections, is part of the process. However, learning the language before you start can help you progress quickly.
“Your offer will likely be against other buyers, so find out from your agent what terms mean such as security deposit, possibility of appraisal, possibility of property inspection. home and the appraisal gap before visiting the homes,” Lautz suggested.
The deposit is the deposit you pay on the property you want to buy. This shows good faith and the funds end up being used for the down payment and closing costs. An appraisal contingency is a provision in your contract that allows you to opt out if the appraisal price is lower than the sale price. This difference between the valuation and sale prices is known as the valuation spread.
Likewise, a home inspection contingency gives you a way out if any issues arise during the home inspection. Either way, you can also try to negotiate with the seller instead of backing out of the sale.
Since the competition is so fierce, many buyers have waved contingencies in order to get a head start.
make a list
Write down your “must-haves” and “nice-to-haves,” said Danielle Hale, chief economist at Realtor.com.
That way, when you need to make a quick decision, you already know what trade-offs you want to make.
It can also help you in a bidding war, easy to win in a highly competitive market.
“Focus on the goal you set for yourself, like your list of must-haves and nice-to-haves and your budget,” Hale says. “Stick to it. Be persistent.”
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Mortgage lenders will look at your debt-to-income ratio, which is the amount of debt relative to your income, when determining your loan. If you have debt, try to pay it off before you start house hunting, advises Lautz.
Consider using bonus money or cash gifts to pay it off. If you don’t have any debt, put that money into savings to help pay your down payment.
Know your credit
Your credit score is also an important factor in getting a mortgage and the type of loan you will get. It also has an impact on the interest rate you will receive and potentially how much money you need for a down payment.
By checking your credit score ahead of time, you’ll know if you’ll need to make any changes or adjustments to try and raise that number.
Also get a copy of your credit report to check for any errors or unpaid bills, which could also affect your credit score. Consumers can get their free credit report up to once a week from the nation’s three largest credit reporting companies – Equifax, Experian and TransUnion – until April.
Talk to a mortgage lender
Contact a lender as soon as possible, at least to ask them questions and find out what they need from you in order to pre-approve a mortgage.
Using online calculators can help you determine what you can afford and whether it makes sense to buy or lease. You’ll also want to know how much money you’ll need to bring to closing, as there are fees – called closing costs – that are due on top of your down payment.
You can also get pre-approved for a mortgage before you start looking for a house, since you will need it before submitting a contract for a house.