If you’re thinking of ditching the rental and buying a home this summer, you’re not alone. Summertime is when the homebuying season typically shifts into high gear.
The warm weather generally brings out more buyers and sellers and houses sell quickly. This year, inventory is especially low, and buyers are seeing more challenges finding a home in their price range.
The stats for May from the East Central Iowa Association of Realtors show the average days on the market for homes within the Dubuque MLS is 26 days. For comparison purposes, the average days on the market was 59 days in February. The reduced inventory has led to bidding wars between buyers and homes selling for over list price.
Despite this, rates are at all-time lows making purchasing a home quite affordable. If you’re ready to buy, that’s great. But if you’re just dipping your toe in the water, keep reading.
This column will guide you to be sure you have all your ducks in a row and will be ready to make a solid offer when you find your dream house.
Know (and manage) your DTI
Your debt-to-income ratio, often referred to as the acronym DTI — reflects the relationship between how much money you owe and how much money you make.
In a perfect world, prospective homebuyers should have as little debt as possible while earning a steady and stable income. This will allow you to afford a mortgage on top of any other debt you might have.
Having a higher than desired DTI doesn’t preclude you from getting a mortgage, but the terms surrounding that mortgage — most significantly the type of mortgage — might be different than if your DTI was lower.
When applying for a mortgage, your loan officer will take all your monthly debt — like student loans, car loans and outstanding or recurring credit card balances — and divide that by your gross monthly income. Ideally, he or she will want to see a DTI ratio of 45% or less. Some programs have higher DTI limits and others have lower limits. It all depends on the program and lender, which is why it’s important to shop multiple lenders when getting pre-approved for a home.
Credit reports and credit scores
Like it or not, someone is keeping track of how good you are at handling credit. Let’s correct that: Three companies are tracking your credit: TransUnion, Equifax and Experian.
When requested by lenders (and sometimes borrowers), these companies pull together credit reports that outline all the loans you’ve ever had, your payment history and how much credit you have been approved for — even if you’re not using it. Because a credit report lays out your creditworthiness and the likelihood that you’ll repay your mortgage on time, lenders rely on it — and a credit score — when deciding on whether to approve your loan application.
Like a credit report, your credit score plays a huge part in your ability to get a mortgage. Just by looking at your credit score, banks and mortgage companies make assumptions on how risky it is to loan you money. Scores can range from 300 to 850 points, with “good scores” landing somewhere in the middle.
Some lenders state a score of 600 is average. Others say you must be at 700 to be considered good. Even if your credit score is in the lower to average range, there are loan products out there to consider.
Get pre-approved (before hitting open houses)
Unless you’re planning to make an all-cash offer, house hunting without first being pre-approved for a mortgage is just snooping in other people’s homes. Pre-approvals show that you are serious.
A pre-approval is an underwritten estimate of how much home you can afford and how much debt you can take on. Pre-approvals are much stronger than a pre-qualification letter, which is really just a guesstimate of what you can afford based on what you state on your application.
Once a lender has determined how much they’re willing to loan you, and verify your income and asset documents, you’ll receive a pre-approval letter indicating the amount. Some Realtors won’t even entertain working with a client unless they have been pre-approved.
Not only does a pre-approval save you time, but it’s also a great bargaining chip when you’re buying in a competitive market.
When the weather gets warmer, people start house hunting. Of course, it differs based on where you’re looking to live, but springtime tends to be busy in general. The high volume of house shopping typically slips into summer, as some people want to be settled into a new home before starting the school year.
While competition might be fierce and inventory a little tighter, don’t be afraid to pounce if you find the right home at a reasonable price, especially if you’ve been pre-approved.
If you can get organized during the summer, work with a good real estate agent to narrow down the communities you’re interested in and stay in touch with your loan officer. If you don’t find a home right away, that’s OK. It might make sense to pace yourself until early fall. That’s when the number of available properties on the market is relatively high — as compared to other times of the year — and sellers may be more eager to make a deal before winter approaches.
Of course, this might not hold true for you. Factors influencing real estate prices can be extremely local. You might find more competition for a specific property while others nearby go unsold even longer.
Remember, stay in touch with your lender to determine how much home you can afford then have your Realtor only show you homes that make sense for you and your budget. The last thing you want to do is to fall in love with a home that you can’t afford, or get approved for.
Homebuying doesn’t happen overnight. Carve out time to do your due diligence upfront and there will be fewer hiccups along the way. Get an early start and you could be enjoying your new home while the days are long.