What Do You Need to Know About Buying a House in Today's Market?
With low interest rates, home prices lower than in many years, and lots of properties to choose from, is now the right time to buy a home? It depends. The collapse of the housing market along with the resulting financial crisis has changed the home buying landscape. To buy a home in today's market requires patience, time, and finances that are in good shape.
Why patience and time? Today's market includes many bank-owned, foreclosure, and short-sale properties. That sounds great, you think! That makes it a buyer’s market. It should be easy to snap one up, right? Not exactly. The process of buying any of these types of homes can be slow, frustrating, and full of pitfalls.
Here are some of the potential problems you will have to overcome.
1. With bank-owned properties, since the bank may own many properties, the bank may be slow to respond to a purchase offer. There are procedures and laws that must be followed for a property in foreclosure. In a short sale, since the lender has agreed to take less than the amount owed on the principal balance of the mortgage, the lender has to agree to the sale. Some times in a short sale, there may be more than one mortgage on a property (for example, a first mortgage and home equity loan) and two lenders may have to agree to accept your offer.
Potential problems to overcome when buying a home
The bank may be slow to respond to a purchase offer.
It is difficult to determine the right value of a property.
In todays market, many houses are being sold when there are still many repairs to be done.
Loan qualifications are much tighter. Lenders are looking more closely at credit scores, your verifiable income and down payments.
2. In today's market, it can be difficult to determine the right value for a property. To determine the value of a property, the recent selling prices of similar properties are used. These are called "comps." Unless you are buying a foreclosed property, then foreclosed properties should not be used in the comps. But in some cases, they are. So, look carefully at the comps used in the comparative market analysis prepared by your agent and the report prepared by the appraiser.
3. Another factor in today's market is the number of properties that are being sold "as-is." If a property is being sold "as-is" that means a buyer must accept the house in its current state without any repairs and sometimes without any disclosures. Before you make an offer, determine if you can afford to buy the property and make repairs, if repairs are needed. In addition, most lenders will not accept properties that need extensive repairs as collateral, so your chances of getting a mortgage on a “fixer upper” are not good.
Whether the property is being sold "as-is" or not, you should always have an experienced and licensed inspector check it out thoroughly. You should go along on the inspection. Don't hesitate to ask questions. Asking these 10 questions of a home inspector can help you find the right professional.
Important tip. Because there are so many potential pitfalls in today’s market and particularly in buying foreclosure or short sale homes (even in buying conventional homes in a neighborhood where there are several such “problem” homes), we recommend that you have an experienced professional such as a buyer's agent or lawyer, who is knowledgeable about the local real estate market and who is working for you not the seller or other parties. If you are dealing with a foreclosure property, the professional should be knowledgeable about the procedures and laws that must be followed.
UFCU has licensed REALTORS® on staff who are experienced and knowledgeable about today's challenging and complex real estate market. If a UFCU buyer's agent is used to find, negotiate for and purchase your home, UFCU will rebate your first month's mortgage payment to you after closing.
4. Even though mortgage rates are low, loan qualifications are much tighter than they were before the market meltdown. Lenders are looking closely at credit scores, your verifiable income, and down payments. The better the credit score and the higher the down payment, the better the rate. You'll need a down payment of at least 3.5% of the purchase price for an FHA loan. But some lenders are requiring larger down payments of 10% to 20%. When you start checking out potential loan rates and terms, start with your credit union. They offer very competitive mortgages.
If now is the right time to buy a new home, here are some steps to help you shop and buy wisely in today's market.
Getting your finances in order
The first step is to review your finances. Lenders will look closely at your debt-to-income ratio — the amount of debt you have compared to your income. The lower your debt to income ratio, the better. If you have balances on your credit cards or have any other significant debts, your debt to income ratio will be higher. What's Affordable in the Home Buying section of the Learning Center can help you review your finances.
Lenders will also look at your credit report and credit score. The information in your credit report can affect whether you can get a loan and the loan terms you receive. You can get 1 free credit report each year from the major credit reporting agencies (CRA), Equifax, Experian and TransUnion, at Annualcreditreport.com. Review all 3 of your credit reports and correct any errors that you find. How to Dispute Credit Report Errors from the FTC tells you how. A credit score is a number that represents the information in your credit report. Credit scores aren't available for free, but you can purchase your credit score for about $10 when you request each free credit report.
If you would like assistance in reviewing your credit report, UFCU offers a credit report review through the Balance Financial Fitness Program. While the review is free, you'll need to provide a copy of your credit report or it may be provided for a small fee.
Do you have enough money set aside so that you can pay your monthly expenses, including the mortgage? You don't want to use all of your cash reserves for the down payment. Lenders will want to see that you have cash reserves.
Getting pre-approved for a mortgage with UFCU
Once your finances are in good shape and you've reviewed your credit reports, it's time to get pre-approved for a mortgage. Getting pre-approved for a mortgage will let you know the maximum amount that UFCU (or other lender) will loan you for a home. To get pre-approved, you will need to apply for a mortgage. Make sure that you are getting preapproved, not just prequalified. "Prequalification" is typically an opinion of what you might be able to borrow for a home, and just as typically, the amount you are told you qualify is exaggerated (partly because the potential lender doesn’t have all the information they will use to make an actual decision). The UFCU Mortgage Center provides more information about pre-approval.
UFCU Mortgage Services is offering an FHA loan for members who have never owned a home. All closing costs, including escrows, are paid for the member by UFCU. Good credit and employment are required. A 3.5% down payment and savings of two months of payments are all the cash needed. This program is available for all transactions under contract as of December 31, 2011.
Finding the right house
Now that you know what you can afford, you can begin to start looking for a house that meets your needs and budget. UFCU's Roadmap to Buying a Home can help you through the process of finding and buying a home.
Making the most of opportunities
Today's housing market offers great opportunities to qualified homebuyers who invest the time and diligence it takes to get the information to make wise decisions. If you are willing to make this effort—and to find the right professional help for the local market where you are buying—then your chances of finding the right home at a price you can afford have never been better.
For more information
UFCU Mortgage Center
UFCU Learning Center: Home Ownership
How to Dispute Credit Report Errors from the FTC
Credit Reports and Credit Scores from the Federal Reserve Board