October 2019 Rochester MN Real Estate Market ReportIt's starting to get a little chilly out, but the Fall colors are looking great!I wanted to share the October 2019 Real Estate Market Report
First Time Home Buyer Guide What To Do Before Buying A House
First-Time Home Buyer Guide: What to Do Before Buying a House
According to industry data, 5.5 million homes were sold in 2017. Are you planning on joining the ranks this year?
If so, you've likely got a ton of questions and to-do lists swirling around in your head. The reality is, before you can sign on the dotted line and walk away with those keys to your new place, there are a few steps you'll need to complete first.
For the first time home buyer, this can be a daunting process, but it doesn't have to be. Knowing who to talk to, where to look and how to best spend your time is a major part of the challenge.
Today, we're sharing a few tips on how to get started so you can clear those hurdles and start settling in.
Ready to learn more? Let's get started.
1. Get Your Credit Score up to Speed
Maybe you're still paying off student loans from college, or maybe you're working to rid yourself of credit card debt. Regardless, if your credit score is less than par, the mortgage application process will be that much more difficult.
As a rule of thumb, if yours is less than 660 or 680, you could end up paying significant fees alongside your loan. Or, you'll be required to contribute a larger down payment to demonstrate your financial security.
The goal is to get yours to at least 700, with scores above 750 earning the best rates. While you're still in the first stages of buying a home, it's wise to try and apply some score-building best practices. These include:
Paying your bills on time
Curbing unnecessary spending
Paying down as much debt as possible
Keeping credit card balances low
Cutting back on new credit applications
Not sure what your credit score is? Pull your reports from one of the three major reporting bureaus and go through them with a fine comb. Take immediate action on anything that looks suspicious or incorrect.
2. Determine What You Can Afford
It's easy to get carried away when creating your dream home checklist. It starts out innocently enough, with a few key details including how many beds and baths you need, preferred school district and the like.
Then, before you know it, you're tacking on walk-in closets, a paved driveway, wrap-around front porch and 10 acres of land. While it's fun to dream, it's important to be realistic.
Before you go down the wrong rabbit hole, use a simple mortgage calculator to determine how much house you can logically and comfortably afford. Look to pay no more than 28 percent of your gross monthly income toward home expenses, or 31 percent if you're applying for an FHA loan.
Of course, once you know what your ideal number is, you'll still need to factor in other expenses that come along with homeownership, including taxes, upkeep, utilities, and insurance. Make sure you're not stretching yourself too thin and that the figures you land on are ones you and your family can all stick to.
3. Anticipate Initial Costs
We've talked finances, but you may still be wondering how to buy a home if you don't have sufficient savings built up yet. The short answer is to start researching and saving today.
Most conventional lenders will require that you pay between three percent and 20 percent of a home's value as a down payment. Precisely how much you pay is based on your credit score, loan type, and other considerations.
For instance, an FHA loan only requires a 3.5% down payment while other loans, including those funded by the U.S. Department of Veterans Affairs or the Veterans Administration, do not require a down payment at all.
Still, even if you're able to get by with a smaller down payment, keep in mind you'll still be required to pay closing costs. If this is a burden, there are down payment assistance programs in place to help offset the costs.
Knowing how much you'll be expected to pay up front can play a huge role in determining how much you need to save moving forward. Research the type of loan you want to apply for, read the fine print and ask your lender questions if you're still unclear.
4. Focus on Your Savings Account
Ultimately, your lender is looking to see that you're financially stable. In other words, you could maintain your same quality of life for a short period of time even if you suddenly suffered a blow to your income, such as a period of unemployment.
If you're living paycheck to paycheck, your savings account balance will reveal this and you could become a greater liability to your lender. Conversely, if you have a few months' worth of savings built up to comfortably cover a mortgage, you could earn a more favorable rate.
Creating this nest egg isn't just a smart step during the first stages of buying a house. You'll also need a store of cash to fall back on to cover those maintenance and improvement expenses that will inevitably come up. A leaky faucet is one thing, but a roof replacement is another and you'll need to be prepared for both.
The Importance of Accurate Budgeting
Want to get a head start on beefing up your savings account? Start by creating a household budget that tracks all of your expenses down to a science. This isn't the time to guess or fudge your numbers. Instead, you'll need to track them down to the penny to get an accurate view of where your money is going each month.
Then, once you know those figures, set a budget from there. Factor in any monthly, routine expenses, such as your utilities, rent or phone bill. Then, add in how much you plan to set aside and save that month.
5. Take Care of Pre-Approval
Before you start looking at homes, talking to a real estate agent or going to open houses, you'll need to know that bottom-line number first. To this end, it's helpful to go ahead and get pre-approved for a mortgage before you begin your home-buying journey.
Doing so can help you save time during the browsing process. You'll know exactly which price range you're working in so you can avoid spending too much time on homes that fall too above or too below that scale.
To get pre-approved, you'll need to meet with a mortgage banker. Be sure to bring along all applicable financial documents. Typically, these will include your tax returns, bank statements, pay stubs or other information on your annual income.
The banker will analyze this information to give you a general idea of the price range you could be approved for when you're ready to apply for a mortgage.
This can also be a valuable time to discuss with your banker the different types of mortgage loan types. The two most common options are a 15-year mortgage and a 30-year one. Each carries its own set of terms and conditions, so consider your overall timeline and budget when deciding between the two.
6. Find an Agent You Can Trust
Sure, you could spend copious hours browsing houses online and fine-tuning your wishlist. But, to expedite the process, make the piles of paperwork more manageable and ensure you're getting the most house for your money, you'll need a reputable and qualified real estate agent.
Interview prospects and find one with whom you can talk comfortably and openly. Also, look for a full-time certified home buying advisor, with years of experience and a knowledge of the local area in which you're looking to buy.
Your agent can also fill you in on the housing market in the community as well as national trends that are affecting interest rates, home inventories and more. This critical conversation can help steer your final decision and help you make sure you're getting a fair deal.
From First Time Home Buyer to Homeowner
Though the process can be challenging, riddled with paperwork, and confusing at times, the path to homeownership is a worthwhile one. If you're a first time home buyer, we encourage you to stay the course.
Building equity is a major move in the right financial direction and can help you put your hard-earned money to work. If you feel ready to take that leap, now is the time to do it.
The good news? You don't have to go it alone.
If you're looking to buy or sell in the Rochester, MN area, let's talk. Our team of experienced and qualified real estate agents is ready to help you take this next important step.
Dan is a licensed realtor in Minnesota. Since 2011, Dan has been a co-owner of the Realty Edge Team with Kyle Swanson, at eXp Realty, at 300 1st Ave NW in Rochester, MN. He shares his life with his so....