If you’re in the market for a new home, you’ve surely noticed that today’s housing market is red hot. Searing with no indications that it’ll cool off anytime soon. Competition is fierce and bidding wars are common, making how you approach your home-buying journey all the more important.
Determine What You Can Afford
A common rule of thumb, used by the Federal Housing Administration and some lenders, is that 31% or less of your income each month can go to a housing payment. That is, if you’re also making monthly payments toward debt, and that debt isn’t more than 43% of your income — your debt-to-income ratio, or DTI. If you’re fortunate enough to be debt free, you may be able to allocate 40% or more of your income each month to payments on your home. An online mortgage calculator is a good way to get an idea of what you can afford.
The Importance of Mortgage Pre-approval
Beyond gauging what you can afford on your own, the mortgage pre-approval process can often give homebuyers a much better idea of what they can spend on their new homes. When you seek to get pre-approved for a mortgage, a lender will do a credit check and go over your financial information, such as tax returns, your debts and assets, employment history, and other information that determine your creditworthiness. Unlike pre-qualification, which offers a general estimate of what you can afford, pre-approval takes a detailed look at your financial situation.
Then what? If you qualify for preapproval, your lender will set a maximum amount you can borrow and give you a pre-approval letter that’s usually valid for 60 or 90 days. This letter doesn’t guarantee you’ll get a loan for that amount, but if your financial situation doesn’t change by the time you apply for a mortgage, the pre-approval amount should be very close to the actual loan amount.
But the benefit of a pre-approval letter goes far beyond determining affordability — home sellers generally want buyers to have pre-approval letters in hand. A pre-approval letter shows a seller that the buyer is serious, and that there aren’t likely to be any major road bumps in getting a mortgage and thus getting the deal done in a timely manner. In today’s competitive market, having a pre-approval letter can mean the difference between getting your dream home or losing out to another buyer.
Look and be Ready to Leap
Historically low interest rates and low inventory have combined to overcharge the housing market, and so homes sell fast these days; the national average is 22 days to sell a house, but many homes find buyers within just days of hitting the market. The clock is ticking for homebuyers — most have days, not weeks, to make decisions when they find the home they want. An active approach is best, checking new listings often, putting daily effort into the search, and investigating each potential purchase immediately. And when you’re ready — go for it! This is the part where the importance of a pre-approval letter can’t be stressed enough. Getting bogged down in a mortgage approval process as your home goes to someone else is exactly what you don’t want.
Keeping Cool in a Red Hot Market
Remember to take some deep breaths, step back from the process, don’t go into panic mode, fearing that your perfect house will get snatched up by a buyer who moves faster than you do. This frenzied approach could lead you to make mistakes. As is often the case with new relationships, if you think a home is “love at first sight,” you probably haven’t gotten under the surface to see its flaws. But don’t be turned off by every flaw you encounter when shopping for a home. You’ll probably have to find some compromise with the home you buy, realizing that it’s not absolutely perfect, but that the pros far outweigh the cons.
Finding the Right Home for You
This can be a tough one; there are hundreds of factors — perhaps even thousands — that one could consider when looking at a potential new home. All of these factors aren’t equally important, and you’ll need to narrow things down to the most important features of a home, those that will affect your everyday life as well as your investment. Here are some major things people often consider when buying a house:
- Price. After you’ve done your due diligence with a mortgage calculator, and perhaps pre-approval, you should take a deep dive into your spending habits. Plus what your move will cost, the closing costs of the mortgage, and the cost of any improvements or repairs the home may need. Take a realistic look at what you can pay.
- Location. Where you live needs to fit your lifestyle; do you want to live a suburban, rural, or more cosmopolitan life? If you have kids, you’ll want to check out the schools in the area, and if your potential new home is in a kid-friendly area.
- Bedrooms. If you have children, or plan to, this is a big one. And don’t just focus on the number of bedrooms; size is a factor, as siblings may be able to share large bedrooms. Does the home have space that could be converted into bedrooms, such as an office or a large living room that could be partitioned?
- Bathrooms. Historically, two full bathrooms for a single-family home have been most common. But the rising trend in newer construction of American homes has been three or more bathrooms. From bathtubs versus stand-alone showers to dual sinks versus single ones, consider which bathroom features you will actually use.
- The kitchen. Kitchens are often the home’s gathering space, so consider if your potential new kitchen has room for your family and guests. Check out the appliances. If the refrigerator, oven, and dishwasher aren’t in good shape, you may have to consider replacement costs.
You’ll also want to look at what kind of outdoor space a home has — yards and gardens are important to some folks — as well as parking, energy efficiency, and more.
