A Guest Post By Betsy Fallwell
My husband’s best friend Josh is a recently divorced father of one. He’s also a professional, just finishing up medical school last summer. He’s got excellent credit, the “right” kind of debt, and a stable income thanks to the salary from his first year of residency. He’s one of many first home buyers trying to take advantage of the low interest rates, high inventories, and reduced property values on the market right now.
First home buyers like Josh often make mistakes, though; mistakes that can cost them the home of their dreams. In a market where home loans come at a premium and even the slightest oversight on your paperwork or research can force you to walk away from a home – and maybe your earnest money – knowing everything you can about the industry, the process, and the market before house shopping is more vital than ever before.
There was a time when you could walk into any bank in any city across the country and get a home loan without submitting much more than your name. For better or for worse, those days are over.
Today, lenders want to see solid debt-to-income ratios, far below the levels that were acceptable before the Great Recession. Your overall debt-to-income ratio – including all forms of debt, like car loans, credit card debt, and your housing expenses – should be lower than 41 percent, while your housing expenses (including mortgage payments, escrow, and other elements like homeowner’s dues) should comprise no more than a third of your gross income.
And property sellers – along with their agents and lenders – also want to see something new: cash up front. On top of earnest money, the housing industry now employs a period known as due diligence. During this period, a prospective buyer pays the seller to put the property “on hold,” while the buyer secures financing. If your financing – or anything else – falls through during this period, you lose your due diligence money. But having your financing preapproved before you put in an offer significantly reduces the risk that you’ll lose your due diligence deposit.
To Whom Can You Turn?
There are literally thousands of home loans available out there; but, if you go to your bank or credit union, you’re likely to only see their products pitched your way.
Instead, opt for a mortgage broker. These professionals work as a liaison between you and lenders, streamlining not only your home loan shopping, but the hefty amounts of paperwork, too. A mortgage broker introduces you to a wide variety of home loans from a variety of lenders, all at no charge to you. Instead, they are paid commissions from the lender whose product you ultimately choose.
Know the Market Value
In order for your lender to give final approval to your loan, they’ll have to conduct a property appraisal. If the property isn’t appraised at a high enough value compared to the loan you’re requesting, it could be grounds for denial.
But knowing the market value of your future home goes beyond that. First home buyers often assume that the asking price of a property is close to its actual value – that’s far from the case. With housing prices dropping over the past few years, some sellers are having trouble grappling with the decreased value, leading them to artificially inflate their asking price. In other cases, a highly-motivated seller may drop the price far below its market value for a speedy sale.
How can you tell what’s a good value? Look at comparable sales in the same neighborhood as your dream house; these comps should be within the past six months, and ideally within the last three. Know this information when you negotiate a sale price on a home; it could help you score a deal well below the list price.
Don’t Stop Searching
Found your perfect home? My friend Josh thought so, too – until a lengthy negotiation process left him utterly frustrated. Fortunately, he hadn’t pulled out of the housing search entirely, and was able to pick up where he’d left off. Ultimately, he ended up pulling out of his deal on the first home and pursued another property instead.
Take a lesson from Josh: remember there are other fish in the sea, and other homes down the block.
Remember the Seller
First home buyers can get so excited about their own housing search that they start to ignore one very important factor: the place they’re trying to buy is somebody’s home. It’s a home where they’ve lived, raised children, created memories. And even though they’re leaving this place, they still want to feel like their home matters to a new owner.
This is why sellers react so strongly when a potential buyer makes a lowball offer on their home. Throughout the negotiating process, keep this in mind: if beauty is in the eye of the beholder, then you and the seller both have something in common – because you both saw the beauty in this one property.