Whether you are buying your first home or you're a seasoned homeowner, the process of buying a new house can be both daunting and exciting. Over the past year in Kentucky and much of the U.S., the housing market has seen higher prices mixed with fewer available houses. The result is a seller's market.
A seller's market is one in which the demand for houses is bigger than the available supply. These conditions lead to rising home prices, multiple or competing purchase offers, and less room for negotiations when closing. If you are thinking about buying a home, take some steps to position yourself as a strong buyer.
Checking your credit
As you begin the homebuying process, take time to understand your financial standing and credit score. Lenders use your credit score and credit report to determine how much money they will lend you and what interest rate they can offer you on a home loan. Credit scores range from 300 to 850, with a higher number representing a better credit history. There are three credit-reporting companies: Equifax, Experian, and TransUnion. You can obtain a free copy of your credit report at www.annualcreditreport.com. Be sure to check for any errors or signs of identity theft that you may need to dispute with the credit reporting company.
Determining your budget
Before you set out on the house hunt, it is important to determine how much home you can realistically afford. Most lenders recommend abiding by the "28/36 Rule." Simply put, the PITI (principal, interest, taxes, and insurance) on your new home should not exceed 28 percent of your gross monthly income. Gross income is the amount earned before taxes. When added to your outstanding debts, like credit cards and student loans, this amount should not exceed more than 36 percent of your gross monthly income. The lower your debt-to-income ratio compared to PITI, the more home you can afford. You can find online calculators to help you crunch general numbers, but be careful not to provide financial or personal information.
Saving for a down payment (and more)
Saving for a down payment is often one of the biggest hurdles facing would-be homeowners. The minimum amount required for a down payment will vary depending on the type of mortgage for which you qualify. To avoid mortgage insurance, a 20 percent down payment is recommended. However required down payments range from 0 percent down (for select loan programs, such as VA or USDA loans), to 3 percent or more (for conventional loans), to 3.5-10 percent or more (for FHA loans).
As you save, you also need to consider other costs that come with purchasing a home. These include home inspections, appraisals, earnest money, closing costs, property taxes, insurance, HOA fees, utilities, moving costs, and expected costs associated with maintaining the home. Closing costs vary depending on the home, but often range from 2 percent to 5 percent of the purchase price.
Getting approved for a loan
When you have enough money saved to begin your house search, it is best to research lending options. You should get quotes from multiple lenders to compare cost and terms. Lenders may include financial institutions, such as banks or credit unions, or mortgage companies. Lenders will need financial records such as tax returns, pay stubs, and statements to verify your assets (such as checking, savings, and retirement accounts).
As lenders compete with each other, you may be able to negotiate to get a better deal. It also may be helpful to see if you qualify for local homebuying assistance programs at https://www.hud.gov/topics/buying_a_home. When selecting a mortgage lender or researching any other service for your new home (such as a realtor, insurance company, or home inspector), remember the "Rule of Three." Ask for referrals from trusted friends, family members, and co-workers and then compare at least three different companies before selecting one.
Beginning the house hunt
Before touring available homes, get a pre-approval letter from your lender. This is the seller's way of knowing you can finance the purchase of their home and at what amount. Having lender approval will allow you to make an offer quickly, as homes in a seller's market can sell within a few hours of being put on the market. To avoid bidding wars, make sure you stick firmly to a budget you can afford. Homes in a seller's market may sell for thousands of dollars over asking price, or with minimal seller concessions such as making necessary repairs. Set spending limits ahead of time to avoid getting into a financially unsound situation.
Working with a relator may help you better navigate a tight housing market. When looking for a realtor, look for someone who is relatable, trustworthy, and can make themselves available to tour houses when listed. While experience is helpful, it may be more helpful to choose someone who is willing to work both with you (your budget, wants/needs) and for you (a good negotiator who values your finances).
Realtors who are familiar with the area can help you quickly tour new listings and can often alert you to homes coming soon to your area. Realtors are paid by commission based on a percentage of the final sales price. Always clarify the commission rate with your realtor before working with them. A buyer's agent is the realtor who represents the buyer. A common commission is 3 percent to the buyer's agent and 3 percent to the seller's agent, but this can vary.
(Reference Consumer Finance Protection Bureau.https://www.consumerfinance.gov/owning-a-home/)