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Looking for a new home may seem like a daunting task these days.
Prices are up, inventory is low and mortgage rates are rising.
That’s why, in this environment, it pays to do your homework before you enter the market. Once you start looking, you’ll have to move at light speed to place an offer, explains Jessica Lautz, vice president of demographics and behavioral insights for the National Association of Realtors.
“As interest rates are climbing, there has been a rush to lock in lower relative rates, while at the same time the inventory of homes has hit all-time lows,” she said.
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The median price of a home in January jumped to $350,300, an increase of 15.4% from January 2021, according to the National Association of Realtors. Homes are spending an average of 19 days on the market.
Meanwhile, the mortgage rate for a 30-year fixed loan is 4.17%, according to Mortgage Daily News. Early last year, they were less than 3%.
With that in mind, here’s what you can do now to put yourself in the best position to find your new home.
Learn the language
Becoming familiar with real-estate lingo, like closing costs and home inspections, is part of the process. Yet learning the language before you jump in can help you move quickly.
“Your offer will likely be up against other buyers, so educate yourself with your agent on what terms like earnest deposit, appraisal contingency, home inspection contingency, and appraisal gap mean before viewing homes,” Lautz suggested.
Earnest money is the deposit you put down on the property you’d like to buy. It shows good faith, and the funds eventually go toward the down payment and closing costs. An appraisal contingency is a provision in your contract that allows you to back out if the appraisal price comes in lower than the sale price. That difference in the appraisal and sale prices is known as an appraisal gap.
Similarly, a home inspection contingency gives you an out if there are issues that arise during the home inspection. In both cases, you can also try to negotiate with the seller instead of pulling out of the sale.
Since competition is so fierce, many buyers have been waving contingencies in order to get a leg up.
Make a list
Write down your “must-haves” and your “nice-to-haves,” said Danielle Hale, chief economist at Realtor.com.
This way, when you have to make a quick decision you already know what trade-offs you want to make.
It can also help you in a bidding war, which is easy to get carried away with in a highly competitive market.
“Focus on the goal you set out for yourself, like your list of must-haves and nice-to-haves and your budget,” Hale said. “Stick to that. Be persistent.”
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Mortgage lenders will look at your debt-to-income ratio, which is the amount of debt relative to your income, when determining your loan. If you have debt, try to pay it down before you start house hunting, Lautz advises.
Consider using any bonus money or cash gifts to pay it off. If you don’t have debt, put that cash into savings to help with your down payment.
Know your credit
Your credit score is also an important factor in getting a mortgage and the type of loan you’ll get. It also impacts the interest rate you’ll receive and potentially how much money you need for a down payment.
By checking your credit score ahead of time, you’ll know whether you’ll need to make any changes or adjustments to try to increase that number.
Also, get a copy of your credit report to check for any errors or unpaid bills, which may also affect your credit score. Consumers can get their credit report up to once a week for free from the nation’s three largest credit reporting firms — Equifax, Experian and TransUnion — through April.
Talk to a mortgage lender
Reach out to a lender as soon as possible, at least to ask questions and find out what they need from you in order to preapprove a mortgage.
Using online calculators can help you figure out what you can afford and whether it makes sense to buy or rent. You’ll also want to know how much money you’ll need to bring to closing, since there are fees — known as closing costs — that are due in addition to your down payment.
You can also get preapproved for a mortgage before you start house hunting, since you’ll need it before you submit a contract for a house.