Feb 09 2022

Preparing to Search for a Home

How much can you afford to spend on your new home? There are a few things you might consider doing before the search starts.
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If you’re thinking about buying a new home, your first instinct may be to just get online and start scrolling through real estate listings. But there are a few things you might consider doing before the search starts.

Determine Your Budget

How much can you afford to spend on your new home? It’s a question most folks must ask themselves even before they begin the search to buy a house. To start, you should take a close look at your spending behavior and determine just what you spend each month. On everything from buying food and eating out to transportation, utilities, and all of your monthly bills. Then figure out the amount a monthly mortgage payment can comfortably fit in with these spending habits.

As a rule of thumb, the Federal Housing Administration recommends that your housing payment should be less than 31% of your gross monthly income. Beyond your mortgage payment, this includes property taxes, and in some cases homeowner’s insurance and mortgage insurance. If you don’t have any other debts, you may consider going up to 40% of your gross income toward home payments when you are buying a home, though it’s unwise to take your debt-to-income ratio past 43%.

Get a Preapproved Mortgage

Why would you want the preapproval of a mortgage loan? Peace of mind is a big reason, knowing that your mortgage will be nearly in place when you find that perfect home. Plus, sellers usually like buyers with pre-approved mortgages, offering proof that the buyer is serious and allaying fears that the deal could fall apart with the denial of a mortgage loan. In today’s red-hot real estate market, where bidding wars are common, the buyer with a preapproval letter in hand has the competitive edge.

Just as you would with a mortgage loan, seeking preapproval from a lender means getting a clear picture of your finances. You’ll want to get a copy of your credit report, showing both your credit score and your history of handling debt and credit accounts. And get your financial info in order, such as proof of income, tax filings, documents for any investment accounts, and employment information — these will likely be needed for the preapproval or when it comes time to apply for the home loan.

Is there any difference between preapproval and prequalification?

Yes, while they both aim toward the same goal — making you a better buyer — there are key differences between the two. You might think of prequalification as dipping your toes into the waters of home buying. Those seeking prequalification likely aren’t certain if their finances make them well-positioned to buy a home and so seek a less formal evaluation from a lender. A prospective borrower will disclose their financial information to a lender and the lender will give an estimation of the amount they may ultimately lend. Lenders generally don’t look at credit reports or do deep dives into one’s finances for these estimates, which are designed to give potential homeowners a general sense of the homes they can afford.

If pre-qualification is toe-dipping, mortgage preapproval is fully wading into the waters; those seeking preapproval are usually ready to buy a home and have their finances in order to do so. During the preapproval process, a lender will pull a credit report, look at debts and assets, and verify income as part of an evaluation of the potential borrower’s worthiness to get credit. Lenders will calculate your debt-to-income ratio and the loan-to-value ratio in deciding the amount and rate of the loan. That does not 100% guarantee you’ll get that loan; final approval still hinges on a home appraisal and no changes in your financial situation. But with a preapproval letter, which is often valid for 60 to 90 days, you can have some degree of confidence the loan you’ve been approved for is the loan you’ll get.

Find a Good Real Estate Agent

This is a tough one — there are lots of real estate agents out there! Here are some tips from experts on finding the right real estate agent for you.

  • Talk with at least three real estate agents before choosing one, and best if that one is local with expertise in the neighborhood you’d like to live in. The more local, the better. Think of these chats as job interviews — because they are!
  • Personal referrals are preferred. While the internet is great, and online reviews and star ratings can be a help, they still don’t trump a person-to-person recommendation from a homeowner who has worked with the agent in the past.
  • Find a realist. Like most investments, buying a new home comes with a certain level of risk and you want an agent who is clear-eyed and honest about those risks to help mitigate them. Flash and flattery are not what you need, but rather a realist who will offer no-nonsense analysis of your potential investment.
  • Trust your gut. Best to get both sides of the brain working as you select the agent that’s right for you. Left-brain logic will look at the agent’s credentials and track record, while right-brain emotion will give you the feeling of whether this agent is your best choice or not.

Make a Comprehensive Wish List

The last thing you want after closing on your new home is buyer’s remorse. So it’s a good idea to lay out exactly what you want before you start shopping with a home buying wish list. And it could be a long list, but well worth the effort. Your list may help you answer questions like: Do you need to be near public transportation? Do you want a yard and if so, what size? How many bathrooms do you want? And on and on. Making a detailed list will make the shopping stage much easier.

How long will you be shopping for a home?

That, of course, varies, and factors that influence your shopping time may include the time of year and the availability of homes that are currently for sale. A common timeline to buy a house can be four months or more, though the National Association of Realtors found that homebuyers shopped for an average of eight weeks, typically touring nine homes. And then it often takes between 30 and 45 days to handle the closing details. So from the first credit check to that day you have the keys in your hand, it could take as long as six months.

No matter how long it takes, ultimately you will call that new house home. And with City Lending, you’ll have a trusted partner with you along each step of the way.

These days, more and more people are looking to buy their dream homes, especially as remote work and work-from-home setups have become an enduring trend. A 15 point increase in requests for home tours and other home-buying services, along with a 11% rise in Google searches for homes, indicate an uptick in demand to buy houses in the country. However, there is a definite worry about affordability when it comes to housing, especially as hefty price tags on available residences have kept the market just as competitive as before, if not more.

According to the latest reports from analysts, it’s not all bad for existing homebuyers and aspiring house hunters. As previous data shows, timing matters in the housing market, and working on different approaches to home buying – like through a reliable lender – can help advance you towards more affordable housing goals. Below, we discuss whether house hunters should buy now or wait, and why.

 

What is your financial situation?


Counter to the rise in home demand, there is a considerable lack of supply. Along with rising prices and interest rates, the housing market may seem like a highly competitive space with wealthy homeowners fighting for what little property is left. It can be overwhelming, but knowing where you stand financially can help you better strategize your home buying journey. Following the four key components of affordability, ask yourself:

  • How much do you have saved for a down payment?

  • How much does your household earn?

  • What debts do you carry?

  • What is your credit score?

 

Familiarizing yourself with these components will help inform your decision on whether or not to wait. For example, taking the time to improve your credit scores before committing can save you from higher interest rates in terms of your monthly mortgage payments. Alternatively, many young homebuyers are compromising by living with family for a significant amount time to save up for a down payment. Getting this out of the way when you’re able to can help you get better loans to buy sooner than later in case interest rates end up increasing.

What kind of home is best for you?

Buying a home is a huge purchase and a big commitment. With shifts to digital and remote ways of working taking place in recent years, this has provided homebuyers with opportunities to be more flexible when buying homes. Homes in areas away from busy cities and urban hubs, for example, are considerably cheaper. This makes them a perfect option for buyers who work from home, or aren’t required to be present in the office on a consistent basis.

The lifestyle you expect to live is as much a factor to consider as money. Condos and townhouses offer lower maintenance costs in the long run, and are perfect for smaller households when compared to single-family homes. If the household grows, homebuyers looking for a side income can even invest in renting out purchased properties to passively earn back what they spent and look into bigger properties for family use.

What does the future look like?


In a previous post, we talked about the rising mortgage and interest rates. While the market may seem bleak or intimidating in its current condition, housing experts also believe factors such as supply have a high chance of returning to pre-pandemic levels by the end of 2024. If you are financially able, buying now while others may be intimidated by the prices can give you an edge. Conversely, taking some time to get your finances in order can benefit you when it comes to securing better loans and lower interest rates.

Working with experts can help you make better decisions for the loans you need, making sure you don’t get trapped with high interest rates or hidden charges. The future of fintech suggests that big data is the future of loans, as more online lenders are now using algorithms, which predict potential defaults better than FICO scores do. Data is also leveraged precisely to identify customers who fit various products well — which can give you peace of mind, as an aspiring borrower. Here at City Lending for example, we find the right programs to fit your needs and profile, making sure you get some of the lowest down payments and interest rates along with a premium service.

And if you’re still unsure, it’s worth considering that waiting it out in the market’s current wild conditions could result in even higher interest rates in the future. At the end of the day, buying a house is ultimately a huge investment, which comes with benefits such as privacy and a financial investment that for the most part will weather most economic storms.

Find out if this is the right time for you to get a house by contacting one of our loan officers today.

 

Content intended only for the use of citylendinginc.com

Written by Alicia Christopher

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