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Spring is here — and with it comes the most popular time of year to shop for a home. But if prospective home buyers don’t prepare properly, they could be in for an agonizing search.
Across the country, many housing markets are seeing a record low number of homes up for sale thanks to fewer existing homeowners opting to move and home builders constructing fewer new homes. Tight housing inventory is, in turn, fueling rapid appreciation in home prices, all while mortgage rates have generally increased at a steady clip.
Not only is that making it less affordable to buy a home for many Americans, it’s also making home purchase process more stressful. This year, perhaps more than ever before, prospective home buyers need to prepare. “It’s probably the most competitive spring housing season we’ve seen since right before the housing crisis,” said Tendayi Kapfidze, chief economist at online lending marketplace LendingTree
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Here are some of the most important steps they need to take, according to housing and personal finance experts:
Review your credit report early and consolidate your debt
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Before searching for a home, they should ensure that their finances are in check. This doesn’t just mean having an emergency fund in place for any unforeseen costs.
Review your credit report, said Kirk Licata, an Atlanta-based certified financial planner and senior adviser with LongView Wealth Management, a financial planning firm. And keep an eye out for errors.
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Consolidate existing debt, Kapfidze recommended. That could lower monthly debt payments and improve a consumer’s debt-to-income ratio, which is one of the factors lenders consider when deciding if a would-be borrower is creditworthy. “That will help you over the hump to get a mortgage,” Kapfidze said.
Decide what type of house you want ASAP
Buyers won’t have time to rest on the laurels in today’s market — and that means they need to hit the ground running. The typical listing on Realtor.com now sells 8% faster than it did a year ago, said Danielle Hale, chief economist at Realtor.com.
Consequently, indecision can easily jeopardize a home buyer’s success in securing a purchase. “A lot of buyers getting into the market for the first time don’t know the difference between a Craftsman, a Cape Cod and a Colonial-style house,” said Rick Sharga, executive vice president at Carrington Mortgage Holdings, a real estate company in Aliso Viejo, Calif. “Understand what house you want to get and what amenities you’re interested in.”
Figure out what you can actually afford
Many buyers may find themselves in a bidding war. Don’t flirt with a home price that’s vastly unaffordable.
A housing budget should include everything from insurance and utilities payments to homeowner association dues and maintenance costs. Plus, property taxes.
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One good rule of thumb: Target a monthly mortgage payment equivalent to 80% or less of what you pay in rent, said Joel Cundick, a McLean, Va.-based financial adviser with Savant Capital, a wealth management firm.
Get pre-approved for a mortgage
Getting pre-qualified or pre-approved for a mortgage is a step that most housing experts now suggest buyers take. A pre-approval letter from a lender will state the maximum amount they are willing to lend to a borrower to finance the purchase of a home.
“It gives you a competitive edge against buyers who don’t have pre-approval letters,” said Holden Lewis, a research analyst at personal-finance website NerdWallet. “Home sellers don’t want to get burned by wasting time accepting an offer from someone and then a couple of weeks later it turns out they can’t get a loan.”
But getting a pre-approval doesn’t just ensure you will have a better shot at competing with other buyers — it can also help you stay true to your budget. Because a pre-approval sets a maximum amount that a lender will give, it restricts consumers from buying a home outside their price range, Lewis suggested.
Shop around for the right lender
Rising mortgage rates have cut into the refinancing business — and to make up for that lost revenue, lenders are competing more to attract home buyers.
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“Not all lenders are increasing rates at the same rate, they have different strategies,” Kapfidze said. “Look at multiple lenders.” Compare their fees and negotiate lower costs for services like the home appraisal.
Don’t expect a computer to do all the work for you
Don’t be overly reliant on online searches, Sharga said. In hot markets such as Seattle, listings may be scooped up before they are even posted online. As a result, most housing experts suggest working with a real-estate agent throughout the process.
Real-estate agents do more than just help find a potential home. “The realtor can tell you what the local tax rate is and give you a sense of what insurance costs,” Sharga said.
