Buying Your Dream Home in Today's Market

Where to Start?

The first step is to get pre-approved. Never before in the history of real estate has it been more important to find out your buying power before you begin looking for your dream home. This helps you know how much you can afford to buy, and it helps you in negotiating a price for purchasing your dream home.

Begin researching different banks and mortgage companies. Find out what products are being offered, along with interest rates. Your interest rate is determined by your credit score. The higher your credit score, the lower your interest rate. A great resource for information on credit and your credit score is myfico.com. At this site, you can research interest rates in your area, based on your credit score, along with a ton of other great and useful information. You can also obtain your credit report and score from any of the three credit bureaus, Experian, Trans Union, or Equifax.

I highly recommend that you print out a copy of your credit report (all three reports if you're feeling gutsy). This way you can show your report to the representative at the financial institutions you choose to interview, and they can evaluate your situation without pulling your credit (and adding a hit to your score).

Most lending institutions will want to see the last two years of your tax returns, two months of bank statements, last two paycheck stubs (though it wouldn't hurt to bring the last four paycheck stubs), and statements for savings or investment accounts. They may require additional information, but if you collect this information, it will make your application process a lot easier.

Here are things that will affect how much you can borrow.

1. Debt-to-Income Ratio

Lending institutions look at your ratio of debt to income to determine how much home you can afford. Generally, lending institutions are looking for your total housing debt to be no more than 28% of your income, and your total debt (including housing) to be no more than 36% of your income. Currently, typical conforming limits look like this:

    - conventional: 28/36
    - FHA:  31/43

Visit my web site to find out what your debt-to-income looks like. The calculators will even help you guesstimate how much home you can afford.

2. Property Taxes

The amount of the taxes for the property gets calculated into your housing ratio in the debt-to-income ratio. This means that if the taxes are $8,000 or higher, it may mean you may not be able to afford that house.

3. Association Fees

Condo associations and Co-op's have monthly assessments. These assessments usually cover master insurance, maintenance and landscaping, and sometimes heating and cable. Co-op assessments usually include property taxes. If the assessments are exorbitant, that may mean you can not afford the property. (Sometimes exorbitant assessments are a hint to association problems, so always make sure to review a condos financial reports.)

4. Insurance

Insurance is also included in the housing debt-to-income ratio. Insurance is usually not too high, but a high insurance amount usually indicates that either the property has had previous claims against it, which if you stumble across this, make sure to investigate it, and that is a whole other post.

Or, it can mean that you have made a few insurance claims. Insurance companies now use a "CLUE" report. It is similar to credit reports, but used exclusively in the insurance industry. It's a database of claims and claimants, and its information affects insurance premiums.

5. Down Payment

The amount you save towards a down payment makes the difference in how much home you can afford. After the bubble burst of 2007, most lenders are requiring homebuyers have at least 5% to 10% put down on your purchase. There are still programs out there that help borrowers with a lower down payment amount. The biggest one is FHA. FHA guidelines allows 3% down, and you can still use a gift and seller contribution (up to 6%) to help you with the down payment and closing costs.

There are all sorts of banks offering different programs.

Wells Fargo, Countrywide, Shore Bank, and Bank of America are all offering various programs aimed towards borrowers without strong credit, 5% to 10% down, and lots of reserves. If you would like some people to contract, let me know, I'll give you some recommendations of people to call that do all that can to help borrowers get to close.

6. Reserves

This is the amount that you will need to have saved over and above your down payment. Lending institutions like to see that you have some kind of reserve to fall back on, in the event things go horribly wrong after you close. The more reserves you have, the more comfortable lenders feel about lending you money.


What's Next?

Once you know how much you can afford, it is now time to start thinking about the type of home you want. Download this questionnaire to help you determine what you are looking for in your new home.

Buyer Qualification Form.doc

Really think about why you are looking to buy. Are you hoping to find a great place to live at a great price that will grow equity during the time you live in the house? Is equity not as important as location, style, number of bedrooms or amenities?

How much space would you like? How many bedrooms? How many bathrooms? What type of upgrades would you like? Would you like it to be a completely upgraded place? Or would you prefer a place that needs some work, so you can personalize it to your tastes?

Answering these questions will help you to describe what you are looking for to your realtor. The more information you provide, the faster you should be able to find exactly what you are looking for.

Once you know what you are looking for, you can start looking for a Realtor to represent you. I hope you would give me a call, but ultimately, this is the person that will represent you on the largest purchase of your life. You need to feel comfortable with your Realtor, and you need to feel you can trust your Realtor to represent you in your needs. Once you have chosen this person, give them your wish list, and keep it coming.

Most buyers, today, begin their home search online. Thanks to the internet, you should be able to find every home that is available in the market today. Feel free to browse the listings that are available at my site. In addition, your Realtor should be sending you the exact properties that you told him/her that you wanted to see. To cut through the thousands of units available, to the precise ones you are interested in seeing.

Once you have identified the property that you are interested in owning and living in, review the comparable prices in the area, then make an offer. If you think the property is overpriced, as it is a buyers market, make an offer where you feel it should be. Your Realtor should be able to give you advice as to whether your offer is way off-base, or if it has a good chance of being accepted.

A good tool to use is to look at the difference between what homes are listed for and what they sold for. Don't forget to look at "Pending" sales. These are really good indicators of what price homes in the area are selling for. If your offer is within the average percentage of difference, there is a good chance your offer will be accepted.

Countdown to Closing

Once your offer has been accepted, you will only have a few more steps to closing.

Generally, it should take 45 days or less to close. Once the contract is executed, meaning signed by both the buyer(s) and seller(s), you then have five days to have your attorney review the agreement and to have the home inspected. Once again, I highly recommend having the home inspected. This small amount invested can save you thousands in future headaches.

After the property passes the inspection and attorney review period, you need to give an earnest money check to the holding party. Earnest money is exactly what it sounds like, it is money the seller is holding for you that shows the seller how earnest you are about buying the property. The amount you give as earnest money is up to you, but a good amount is usually around 5% of the purchase price. As earnest money is applied to the buyer's side at the closing table, 5% usually covers your closing costs, and will be 5% fewer dollars you will need to bring with you to the closing.

The next step will be the appraisal. Your lender will send the appraiser out to the property to make sure it is as valuable as the amount being loaned on the property. Once the appraisal is done, your lender will begin the final approval process to get you and the property clear to close.

Once you are clear to close, the closing date will be scheduled and you are headed to the closing table to sign many documents, and then receiving your keys, and voila, congratulations, you are now a homeowner.