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2023 brought an unprecedented housing market. Supply is still notoriously low, and interest rates remain high. With these combined factors, fewer homes are available for sale, and the cost of buying a home is still high. However, rent is also pacing the housing market, and many are finding that a mortgage provides more payment consistency over the potential of a landlord adjusting for inflation.
With rates stabilizing and home inventory still low, 2024 doesn’t appear to be significantly different. With all these factors in motion, understanding how to buy a home is more important than ever. Below, we compiled the steps and thought processes to navigate the current market.
1) Deciding if You’re Ready to Buy a Home
The first step in purchasing a home is determining that you’re ready. Some important questions to ask yourself include:
- Do I have stable and reliable income? Guidelines vary by lender, but most lenders like to see two years of consistent income. It doesn’t typically need to be with the same employer but should show a pattern of consistent earnings in a similar field.
- Do I have a good credit score? A higher credit score can lead to better mortgage rates and more options from lenders. Most lenders expect a credit score of at least 620, though credit score minimums vary by lender and loan type.
- Do I have a manageable debt-to-income ratio? Debt-to-income (DTI) ratio compares your monthly recurring debts to your gross monthly income – essentially, the percent of your income that goes towards debt. Lenders typically like this figure in the low 40s, though some lenders may accept higher, exceeding 55%, depending on the lender and loan type.
- Do I have enough money for a down payment? Unless you’re a veteran, you’ll need to have enough money saved for a down payment. VA loans, a loan program specifically for veterans, do not require a down payment. Other loan programs typically require at least 3 to 5 percent down.
- Have I budgeted for extra costs? A down payment is only part of the equation. Budgeting for closing costs, moving expenses, home maintenance, repairs, and potential utility increases makes a more prepared homebuyer.
- Am I prepared to navigate market conditions? Understanding market conditions helps set realistic expectations about what’s available and what you can afford.
Keep in mind that requirements vary by lender and loan type. Certain lenders may require higher credit scores or down payment requirements than others.
2) Get Preapproved for a Mortgage
Getting preapproved for a mortgage early on is a strategic move in your homebuying process. One of the key benefits of early preapproval is it provides a clear understanding of your budget.
Preapproval reveals the amount a lender is willing to lend, which saves you time and effort by preventing you from considering properties beyond your price range.
A preapproval letter can also give you a competitive edge in the housing market. Sellers often prefer buyers who have secured preapproval as it indicates seriousness and demonstrates financial capability. This assurance can be especially valuable in markets where multiple offers are common.
Beyond its impact on your home search, preapproval can also accelerate the homebuying process. Preapproval requires completing most of the paperwork needed for a mortgage application, meaning you’ll be a step ahead when you decide to make an offer on a house. Better preparation leads to a smoother and faster closing process, allowing you to settle into your new home sooner.
» MORE: See today’s refinance rates
3) Find a Real Estate Agent
Engaging a good real estate agent is crucial in your homebuying process. These professionals bring a deep understanding of the local housing market. They can guide you on neighborhood specifics, pricing trends, and purchase timing, ensuring you have all the information you need to make informed decisions.
A seasoned real estate agent may even have a pulse on a handful of listings before they hit the MLS feed. This scenario is typical of agents with multiple clients who are buying and selling and can provide a competitive edge in a fast-paced market.
Additionally, the negotiation skills of real estate agents are another asset. These professionals excel in the complex realm of real estate transactions. They can help you determine appropriate offers, negotiate contract terms, and avoid potential pitfalls.
Real estate agents also simplify the homebuying process by handling paperwork and legalities. Their expertise helps ensure that no crucial detail goes unnoticed. Moreover, they can connect you with a wide network of professionals, including home inspectors and mortgage lenders, ensuring you have a reliable team of experts.
Remember that the real estate agent you choose plays a significant role in your homebuying experience, so finding someone you trust who aligns with your needs is essential. By interviewing potential agents and asking about their experience, negotiation style, and the services they offer, you can ensure you have a supportive partner to guide you on your homebuying journey.
4) Search for Homes, But Be Patient and Flexible
There are many home listing sites to utilize for your search. Your agent may have their own listing portal, or you can use a tool like Realtor.com to find available homes in your area.
In today’s competitive housing market, patience and realistic expectations are key. Finding your ideal home may take longer than anticipated, and accepting this can help ease your stress levels.
Prioritizing your needs is also vital. Distinguishing between your “must-haves” and “nice-to-haves” can make you more flexible and receptive to various options, especially when housing inventory is low.
If your preferred areas yield limited choices, consider broadening your search to different neighborhoods or types of homes. This can present more possibilities that fit both your needs and budget.
In this fast-paced market, striking a balance between swift decision-making and careful consideration is essential. Despite the pressure, remember to avoid rushing into a decision. Your comfort with this significant financial commitment should be paramount.
5) Negotiate and Make an Offer
Once you’ve found a home, it’s time to make an offer. Now is a great time to lean on your agent. An experienced agent will have a pulse on offers in the area, giving insight into whether sellers are taking above asking or willing to take concessions.
When forming an offer, remember the following:
- Trust the Expertise: Real estate agents are experienced professionals who understand the ins and outs of the market. They will likely advise you to trust their expertise, especially when assessing the local market and developing a negotiation strategy.
- Understand Value: Agents often stress the difference between the price of a home and its value. They will help you understand factors contributing to a home’s value, such as location, condition, size, and recent comparable sales. This data can help you make a more informed offer.
- Don’t Get Emotionally Attached: One of the most common points of advice is to avoid becoming too emotionally invested in a single property. Emotions can cloud judgment and lead to overpaying or overlooking potential issues with the home – especially in times when available housing inventory is extremely low.
- Stay Patient and Flexible: In a market with high competition and low inventory, be patient and maintain some flexibility. This could involve broadening your search area or being open to homes that may not tick every box but meet your main needs.
6) Prepare for Closing
After the seller accepts your offer, it’s time to prepare for closing. Preparing for closing involves several important steps. First, an accepted offer sets the underwriting process in motion with your lender. Your lender will order an appraisal to confirm the property value and double-check all your income and asset documentation.
The appraisal verifies the property’s value and sales price. Appraisals don’t typically uncover major structural issues, so it’s important to consider getting a home inspection.
One of the most important things you can do is get a home inspection. Given the high prices and competition, it’s tempting to skip the home inspection to make your offer more attractive. However, a home inspection can uncover potential issues that could cost you a lot of money.
A home inspection helps identify hidden issues, such as structural problems, outdated electrical systems, or a deteriorating roof. Understanding these potential problems beforehand can inform your purchase decision and provide leverage. If the inspection uncovers significant issues, you can either negotiate a lower price to cover repair costs, request the seller to fix them or walk away from the deal, typically without repercussion.
Next, arrange for home insurance. Lenders require proof of home insurance for the property before the closing date. Comparing various insurance offers can help you secure the best coverage at an affordable price.
The final walk-through, typically occurring 24 hours before closing, is your opportunity to confirm that the home’s condition matches your agreement and the seller completed any required repairs.
As you approach the closing date, gather the necessary documentation to bring to the closing. Documentation for the closing table typically includes a valid ID, a check for closing and other documents your lender specifies.
You’ll finalize the home purchase at the closing meeting by signing all necessary paperwork. Once you’ve signed all the documents, the last step in your homebuying journey is collecting the keys to your new home.
By carefully navigating these steps, you can ensure a smooth transition from an accepted offer to home ownership.