Traditionally, spring is the time when people put their houses up for sale. Flowers are blooming, birds are singing, and the hope is that the beauty of the season will render the homes on the market irresistible to prospective buyers.
This spring, we’re likely to see quite a bit more inventory. People have mostly recovered from the shock of rising interest rates—and rates have come down a little from their recent peak (now, rates are more in line with historical averages).
If you’re thinking about buying a home, this is a great time to get your ducks in order, but what does that mean? Well, I’m glad you asked.
Unless you have hundreds of thousands of dollars laying around, you’ll need a home loan—a mortgage. Lenders prefer to minimize risk whenever possible, so if you want the best loan terms, you’ll need to demonstrate you’re a safe bet. Here’s how.
Save Up Some Cash
The more cash you can save, the better the loan terms. You’ll need cash both for the down payment (ideally, 20% of the sale price) and for the closing costs. If you cannot come up with a 20% down payment, don’t panic. There are plenty of loan programs that do not require a big cash reserve, especially if you’re a first-time homebuyer.
Pay Down Your Debt
Lenders don’t want their loan competing with other debt you may have. They are far more comfortable when they feel confident that you have sufficient income to make payments. They love it when their loan is your only loan. If you appear to them to be the perfect borrower (that is, you have absolutely no other debt, among other attributes), you may be able to get a loan with a 50% debt-to-income ratio, that is, when the combination of property taxes and insurance and your mortgage payment add up to 50% of your income. Generally, lenders like a debt-to-income ratio under 35%.
If you have other debt, start with whatever has the highest interest rate and pay as much as you can until the debt is done, be it student loans or credit cards. Once you do this, your likelihood of a loan will increase dramatically.
Maintain Stable Income & Good Credit
The other attributes that make you an attractive borrower include having a stable income and good credit. A stable income means you’ve been at your current job for a couple of years and ideally, you’ve been working in the same industry for longer than that. Good credit means you have a FICO score of at least the mid-600s, the higher the better. (FICO is an abbreviation for the Fair Isaac Corporation, the first company to offer a credit-risk model with a score.)
If you don’t have a great credit score, do what you can to improve it by paying every bill on time and getting any mistakes corrected. And don’t take out any new credit (no new car loans or credit cards!)
Get Pre-Approved
Before you start looking at houses to buy, select a Realtor and they can recommend local lenders for you choose from. You’ll be a much more attractive buyer if you’ve already been pre-approved for a loan, because to get a pre-approval letter, the lender will do all the work of qualifying you, including verifying your credit, income, and cash. The letter confirms what you can afford, so a seller doesn’t have to wonder whether the escrow will fall through for lack of ultimate loan approval.
Before you talk to a lender, gather your tax returns, pay stubs, receipts from your landlord that show on-time payments, and anything else that will help the lender understand you’re a good risk.
For homebuyers who are in the enviable position of being able to afford a higher price tag in Ukiah, you should know that the conforming loan limit recently increased to $766,550 for a single-family home. If your loan is under this amount, it’s considered a conforming loan, which means lower interest rates and more options for beneficial loan programs.
To qualify for a loan, your income has to be reportable. If you and your spouse or partner are buying a home together and one (or both) of you is paid under the table, you’ll have a hard time qualifying for a loan, even if you have plenty of cash for the down payment.
Once you’ve got your pre-approval letter in hand, have fun finding your dream home!
If you have questions about property management or real estate, please contact me at rselzer@selzerrealty.com or call (707) 462-4000. If you have an idea for a future column, share it with me and if I use it, I’ll send you a $25 gift certificate to Schat’s Bakery.