October 17th, 2011 4:57 PM by Eileen Denhard
Even with interest rates and home prices at all-time lows, many potential home buyers, especially first-timers, are on the sidelines. They’re concerned about the economy, their job, their savings, or their ability to actually get a loan. But real estate is cyclical. If you look at the past 50 years, real estate has gone up and down. We’ve been in a down cycle for some time now — which followed many years of an up real estate market. It’s inevitable that buyers will gradually move off the sidelines and start making their way toward the end zone again. If you think that next year, or even 2013 might be your time to buy, there are steps you can take now to get ready. 1. Start experimenting with online mortgage tools and online listings When to do it: Anytime. To figure out how much you can afford, go online and enter down payment and purchase amounts into a mortgage calculator. This is a great first step. But it’s just that: a first step. Mortgage calculators don’t take into account factors that will determine the type of loan for which you’ll qualify. Many people don’t realize that interest rates change every day and can vary dramatically between a condo, house or multi-unit building. Also, your credit score, amount of savings and current debt play a gigantic role in determining whether you can get a loan, and if so, how much a bank will lend you and what they will charge you. 2. Engage a local real estate agent When to do it: As much as a year before you plan to buy. Most real estate agents will tell you that you should get pre-approved for a mortgage before they will speak with you. I think that’s the wrong approach and, in reality, it’s not how the actual home buying process works. I tell buyers to engage a real estate agent very early in the process. A good agent would welcome the opportunity to sit down with you months, even a year, before you’re really ready to make a move. In this meeting, learn as much as possible about your local market. Is it currently a buyers’ or sellers’ market? What’s the inventory like? How long should you expect to look for a home in your desired area? What are the local trends? Many people hear about national trends and statistics. But real estate is local, even down to neighborhoods and blocks. Real estate agents can provide the most up-to-date state of the market, sometimes weeks or months before the media picks up on it. You’ll want to understand your local market’s dynamics, because they’ll play a part in your home-buying journey. Don’t know a local agent? Ask for a referral from a friend or co-worker or search online for a local expert. 3. Analyze your financial situation with a mortgage professional When to do it: Soon after you’ve chosen your agent. You will need to take a hard look at your financial picture and learn about getting a mortgage. What types of loan products are best for you? What is required to get the best possible loan? How does your credit score affect it? What are the current mortgage rates? How much can you afford today? Tomorrow? What you can afford will likely dictate the type of home you buy (condo or house, fixer upper or a gut renovation) and where you buy (prime school district or the up-and-coming neighborhood). But, before you start dreaming about your fancy new digs, you have some important financial analysis to do. Analyzing your complete financial picture will reveal a lot as you consider home ownership. The amount a bank will loan you, and the subsequent rate it charges for that loan, will be based on your entire financial picture. The following examples can create red flags that will require you to do some financial “homework”: Recently financing a new car year may have a negative impact on credit. Not enough savings because banks require “reserve” money, in addition to a sizable down payment. A newly self-employed person likely needs two years of work to be able to qualify. One late credit card payment can send your credit score below an acceptable number. Personal things like a recent divorce with shared debt can get in the way. As a result of this process, you will likely have some financial “homework” to do. In order to do this analysis, you’ll need to hand over all of your financial information to a mortgage broker or bank. This includes, but is not limited to W2’s or 1099’s, six months of bank statements, proof of current income, copies of tax returns, and brokerage account statements. At the end of this exercise, you will be pre-approved for a loan. This will tell you how much house you can afford. 4. Ask yourself the hard questions and do your financial homework When to do it: After you’ve been pre-approved. Once you’ve gone through the approval process, you know where you stand. Some people will be in great shape and ready to start shopping tomorrow. Others may need to save more money, fix their credit score, or hold off until they get that much anticipated raise next year. This is the time to decide if home ownership is the best for you right now. Take stock of your situation and ask yourself some tough questions. Do you love your job and do you plan to be there for the next five years? Is your income and your job situation stable? Do you really want to put down roots in this area or are you itching to be closer to (or further away from) family? Can you commit to at least five years in a new home? Are you in a relationship or do you plan on being in one? Would you want to go into financial “business” with that person today? In one year? Do you plan on having children? These are all important questions that, if fleshed out well in advance, can save you a lot of time, headache and financial stress. I can’t tell you how many people bought a home, only to take a job transfer or experience a relationship break-up that forced them to sell at a loss six months later. 5. Re-engage your real estate agent When to do it: Once you are ready to buy Once you have your financial situation figured out, it’s time to go back to your real estate agent. Let them know the result of your pre-approval process. You will likely need a pre-approval letter in order to write an offer on a home. In short order, you should get up to speed with what you can get for the money and where — right down to the streets and blocks. To be an educated buyer, you need to see as many properties as possible. This is important to understand the housing stock and to know what you get for the money as well as what you like and don’t like. Once you’ve gone through these steps, you’ll know — sometimes immediately — when the right house comes along. And then, at last, you’ll be ready to make a wise, well-planned move.