Spring is often seen as the best time to buy a house. This year, though, things may not be so easy for buyers -- LendingTree's Chief Economist Tendayi Kapfidze recently told MoneyWatch that we're in the middle of the "most competitive spring housing season we’ve seen since right before the housing crisis."
So if you're thinking about getting your own piece of the American dream, you better come correct. Here's what you need to know before things get serious.
Do you want to own a home? Or does your mom?
The first thing you should do before you even start looking at listings is to ask yourself why you want a home. Times have changed, and sometimes a home isn’t the smartest investment. If you’re currently renting and wondering if you should uproot your life to chase a facet of the American dream, Zillow has a calculator to help you determine if you’re better off renting or buying.
Get right with your credit
Get familiar with your credit score. You can get a detailed (and free) credit report from any of the big three credit bureaus (Equifax, Experian or TransUnion) once a year. This report dives into your score as well as what you can do to fix it. Websites like Credit Karma and CreditWise give you a more general view of your score for free whenever you’d like.
Some conventional lenders won’t consider you if your score is below 620, and less-than-great credit can affect how much you’re lent, your interest rate, and how much you’re going to have to fork over for a down payment. It’s actually surprising how easy it is to repair your credit once you know your score and all of the factors that contribute to it. Once that’s squared away, you’ll be one step closer to being a homeowner.
Make sure you’re financially prepared
Depending on your credit score, you will have to make a three to 20 percent down payment, but remember: The more money you put down up front, the lower your mortgage payments will be. On top of that, you’ll have to pay two to five percent of the price of the home for closing costs and inspection fees.
After the home is yours, you’re also pay insurance, repairs, improvements, HOA fees (if applicable) and property taxes. According to the U.S. Census, the average American pays 0.95 percent of a home’s value annually on property taxes, but some states, such as Illinois, New Jersey and New Hampshire, have rates over two percent, and that means the annual payment can stretch into the five figures. Also: The average homeowners insurance payment falls somewhere between $300 and $1,000 a year. Get a general estimate by dividing the value of your home by 1,000 and multiplying that by $3.50.
Want to know what you can really afford? A good rule of thumb is that the chunk of your monthly take-home pay that goes toward housing (mortgage, property taxes and insurance) shouldn’t be higher than 28 percent. Knowing exactly what you can afford gives you the freedom to search for a home that doesn’t stress you out, because it isn’t breaking the bank.
Before you start looking for a house, it’s best to get pre-approved for a loan, because many real estate agents won’t even talk to you without pre-approval. You wouldn’t want to find your dream home and then have no way you can afford it.
Conventional bank loans aren’t your only option. FHA mortgages are ensured by the Federal Housing Administration, and they offer competitive interest rates without making your down payment impossible. If you live in a rural area, the USDA may offer a loan with no down payment requirements and fixed payments. The Good Neighbor Next Door program offers aid to firefighters, police officers, EMTs and K-12 teachers. If you don’t fall into those categories, online mortgage lenders like Rocket Mortgage, SoFi and Guaranteed Rate can still offer a competitive rate. Also, if you get a pre-approval letter, you can better compete with other home buyers.
Here’s a useful tip: Once you are pre-approved, don’t do anything that could affect your pre-approval, like changing jobs or taking out another large loan. That could risk status once you actually go to buy the house.
Make sure the house isn't a money pit
Once you find the house that might be the one, make sure that everything offered in the listing is included with the sale. For example, sometimes appliances or fixtures remain with the previous owner, not the home. All renovations should be up to code. If not, you might have to foot the bill to tear down something that was built illegally by the previous owner. And there’s always the chance that some couple from House Hunters blew through there and trashed the place. FindLaw has a detailed checklist to help you remember all of the important things to look out for. Get a reputable inspector from the American Society of Home Inspectors who can look for any water issues, asbestos, old electrical wiring or mold. Make sure you have this built into your budget, though, because an inspector can run you $200 to $400 depending on the size of your house.
Now that you know these five simple things, you are definitely prepared to tackle home buying head on and find the perfect home for you and your budget.