Jumping on the real estate boom? Do your homework first
Over the past several months, everyone’s lives have been upended, with consequences nobody predicted. One unexpected result of the pandemic? A real estate boom.
With so many more people working from home, people are re-evaluating their living spaces, including those who need to factor in homeschooling. Some families are realizing they need more bedrooms, larger yards or just more space in general. Others who have suffered financial setbacks may be looking to downsize. And many city dwellers are trying to move away from congested areas to smaller towns or suburbs. All of these changes, plus the low mortgage rates, have resulted in plenty of activity in the housing market.
If you’re one of the many Americans considering a move, here are some tips to navigating the process successfully right now.
1. Check your credit
Long before you make any large purchase, whether it’s a car or a home, you should check your credit score and your credit report.
Before you even start scoping out neighborhoods, visit AnnualCreditReport.com, a site where you can access for free your credit report — these days, on a weekly basis. Also be sure to review the report to ensure there are no errors. You can also check your VantageScore credit score for free at websites like CreditKarma.com, MyLendingTree.com and MyCreditGuide from American Express.
The VantageScore model, widely used by lenders, helps both consumers and lenders by providing a more accurate representation of the risk for someone to default on a payment on his/her loan. It also provides more consistent scores regardless of which national credit reporting company provides your score, which is helpful especially for first-time home buyers.
If your credit score is not up to par, improve it by:
- Making timely payments on bills, especially credit cards, and pay more than the minimum when you can.
- Reducing the percentage of revolving credit you’re using by paying down some of your cards. Under 30% of the maximum credit available is optimal.
- Asking for your credit limits to be increased. If you increase the credit limit but don’t charge more on your card, you’ll be using a smaller percentage of your limit.
- Keeping a neglected credit account active by making a small purchase on it that you can quickly pay off.
No matter which strategies you use, allow a few months for your improved credit habits to show up on your report before applying for a mortgage.
2. Get pre-qualified for a mortgage
Being pre-qualified makes you a much more attractive buyer.
The first step in getting pre-qualified is checking your credit score (see above).
Next, crunch some numbers. You’ll need to figure out your debt-to-income ratio (DTI) based on the anticipated mortgage monthly payment: How much (percentage) of your gross monthly income goes toward debt (student loans, credit cards, car payments, etc.)? Most mortgage lenders look for a DTI of 36% or lower. If your DTI is high, see if you can decrease your debt by paying some down and/or increase your income (perhaps with a part-time job).
Apply with a number of lenders — some will give you better rates than others. Before applying, ask what information and documents you (and your co-borrower, if there is one) will need. This will include proof of employment and income, plus previous tax returns.
Also, be sure to apply to all the lenders within a span of two weeks. That way, only one “credit inquiry” will impact your VantageScore credit score.
3. Take advantage of virtual home tours
Save time and stay safe by touring homes virtually while you're in the initial stages of house-hunting. Once you've narrowed down your choices, you can ask about visiting properties in person, following safety protocols.
4. Leave your emotions at the door
Whether you're buying and/or selling, don't let the emotions of the moment push you into making a hasty decision. Make sure you know your budget and the acceptable terms or conditions for the purchase (or sale). If the seller (or buyer) suddenly changes something about the deal — from the closing date to the offer or asking price — don't make a snap decision. Tell them you'll think about it overnight and discuss it with your real estate agent. Weigh the pros and cons before agreeing.