There are always things you need to do when making such a large investment as buying a home so that you can make a more educated purchase. Following are some tips from the pros.
Be aware of how much you can really afford
What is your home buying power? It is the combination of your credit score, the amount of money you are working with, and your salary, which tells the lender how much you can realistically afford to pay for your monthly mortgage payment.
There are costs to buying a home that most buyers don't think about. You could possibly qualify for a mortgage with as little as 3-3 1/2% down payment. There are also other closing fees that both a seller and a buyer has. A buyer will have title fees plus prepaid mortgage, escrow, and other lender fees. Any buyer that puts less than 20% down will have to pay PMI (Private Mortgage Insurance for conventional financing) or MIP (Mortgage Insurance Premium for FHA financing).
Most buyers I work with know what they feel comfortable paying every month, and it's usually less than what their lender says they can afford. However, sometimes when they look in their "comfort" price level, they can't find anything acceptable, and start looking at the higher priced properties.
A buyer can't always go by current interest rates. Interest rates depend on your credit score. The higher the score, the lower interest you can get. If you have a low credit score you usually have to pay a higher interest rate. Sometimes, you'll be able to pay a fee to get a lower score, but you'd have to discuss that with your lender.
Your lender will help you to get pre-qualified and give you a price that you can get a mortgage for. The rule of thumb with most lenders is that your monthly mortgage payment shouldn't be more than 36% of your gross income. That can fluctuate depending on conventional or FHA financing.
You might need professional help to fix bad credit
What is a good credit score? Although you might qualify to get a mortgage with a lower score, a good score is usually 720 or higher. There are free resources to check your FICO score, so you should do that before you start searching for a place and even before you speak to a lender. Be prepared!
If you have a lower than expected credit score, you might need professional help to get it higher. There are many resources out there and you can do it yourself by paying any judgments off and making your monthly charge card, auto loan, and other payments on time. This could take some time but you won't be able to get a mortgage without cleaning up bad credit.
When you fill out a loan pre-application form or speak to a lender, be honest with your responses. They will be able to discover anything you might be trying to hide. During the mortgage process, don't open any new lines of credit. There are buyers that were approved for their mortgage that went out and bought a new car just before closing - they did not close! New car, no house... Mortgage underwriters can make an updated credit search up to the day of closing.
If you're not quite sure if your credit score is good enough, ask your loan officer to check your score. You might be able to avoid the cost of a credit repair service by just talking to your lender. They will be able to give you ideas on what you need to do to become creditworthy.
Find a local agent that is working 100% for you!
Many buyers of real estate think it's best to work with the listing agent of a home. That is a false belief. If you work with a listing agent to purchase one of their listings, you have given up representation. They are considered "Dual Agents" and can't give you full representation. You want an agent that is working for your best interests! A Dual Agent is more akin to a middleman - working for both the buyer and the seller. They can't give either their full fiduciary duty as a Dual Agent.
You also want an agent that has experience and knowledge of an area. In Northern IL and the southwest suburbs, we work in many different towns. An experienced agent doesn't have to work in just one town (most villages in our area are too small for an agent to just concentrate in one of those areas), but they have to have experience in real estate and the area.
An agent cannot tell you which town or area to look in, but they can help you with different reports we have access to that shows average prices in different towns. You can compare these prices and will be able to make your own decision as to what areas are increasing in value and what are stagnant, or even going down in value.
I always create a Comparative Market Analysis (CMA) for buyers for any property they're interested in. These reports offer factual, updated data to help educate you on current pricing for a particular area and style of house with similar amenities.
Don't wait for when you think the best time is to buy
The real estate market fluctuates from year to year and even in different months. There are many reasons why we could be in a Seller's Market vs. a Buyer's Market - the economy and current inventory are two indicators.
A hot market can be very frustrating to a buyer. If you like a particular home, there could be other buyers that also want to make an offer. Now you're in a multiple offer situation, where the seller will choose the best offer (usually the highest price, but sometimes there are other factors such as a quick closing or a cash offer vs. financing). This is more prevalent at lower prices. The higher the price range, the less competition you'll face. There can still be multiple offers at higher prices during a hot market.
Before you begin viewing homes for sale, give as much detail as possible to your real estate agent as to what you're looking for. We usually know if what you want is realistic in your price range. It might take several showing appointments for you to see what you can get for your purchase power. You might have to lower your expectations or up your price (if you can qualify to do so).
If you find the right home, don't wait too long to make your offer
In today's market, if a home shows good and is priced well, it can sell in a day! We never push our buyers, but you could get upset that a house you're thinking about and want more information on was whisked away by another buyer that was ready to pounce on it.
You might lose a few properties due to this. Some buyers realize they can't wait to make an offer and will have to move a little faster than they'd like (you'll always have an Attorney Review and home inspection period). It's not fun to lose a house you love. Maybe you just weren't ready to make an immediate offer (when others were). Maybe you wanted more information - you had questions about the home (others didn't).
We see this happen a lot in a hot market. Buyers think the home they like will be on the market until they're ready to make their offer. That isn't always the case. After a few misses, most buyers understand that they can't take their time and if they want a chance at a home they have to make an offer as quickly as possible.
I've had buyers in hot Seller's Markets that gave up and waited for things to slow down a little. In an active Seller's Market, offers can be made higher than asking price.
Understand the home inspection
The inspection is our next set of negotiations. In our area, the attorneys usually handle inspection repair requests.
Our contracts have been updated this year (2019). In easy-to-understand terms, a buyer should only ask for major mechanical items that are broken or causing a health hazard. Age is not a reason to ask for a replacement or any kind of warranty. In fact, if a buyer doesn't follow the inspection clause in our contract, the seller can immediately declare the contract null and void (and will return the buyer's earnest money).
You definitely want to have an inspection. You can use one of our recommended inspectors or any licensed inspector. The inspector will not only point out deficiencies, but they will offer maintenance tips and ideas. They will be very thorough and will tell you everything they see, but that doesn't mean the seller will fix all of these items. In fact, even if it is a major mechanical item that is broken or causes a health hazard, the seller doesn't have to fix anything. They will probably have a difficult time selling the home and/or will have to come down in price, possibly by more than what the item would cost to fix, but that's the seller's problem.
Also, rules have been changed regarding repair escrows. They don't use them any longer, at least not in our area. This means that it is more difficult to get a credit from the seller for repairs. If you've asked for closing cost help from the seller, depending on the type of loan and the amount you put down, you might not qualify for any additional credits. If the cost of repairs were to come off the purchase price, that doesn't put the cash in your hand to make the repairs.
If the seller won't fix the major items that you've asked for, you have the right to terminate the contract and get your earnest money back. All of this has to be done in a specific time (we need to have the inspection done and any repairs that we've requested within 5 business days from contract acceptance). If you love the property and can take on the repairs yourself after the closing, then you might choose to continue on with the purchase.
With FHA or VA financing (even conventional if they're requiring repairs), these have to be completed prior to closing. If the seller allows, the buyer can do these repairs themselves prior to closing, but you have to understand that you're repairing a house you don't own yet!
Don't change your credit before you close
● I've mentioned this before, don't make any major purchases prior to closing - no cars, furniture, etc. Don't open any new charge cards.
● Don't change banks or make large withdrawals or even big deposits until you close.
● Keep your current job - even if you hate it, don't switch jobs or quit until after closing. If you're a salaried employee, don't change to self-employment.
● If you have someone asking you to cosign for any kind of loan, don't do it! At least not until after you've closed on your home purchase.
Judy Orr and Jimmy Herter are a husband and wife team that can help you wade through the intricacies of making a home purchase, which could possibly be the biggest financial endeavor you've ever taken. We believe in homeownership and want to educate you so you're empowered to make the best decisions in this process. We know the areas we work in, the process of home buying and our contracts. We have over 3 decades of experience. Call 708-536-8200.