Thinking about buying a home in 2011? If so, you’ll find this top-ten list helpful. When you’ve completed most of the steps on this list, you’re probably ready to buy.
Home-buying activity is expected to pick up a bit in 2011, when compared to 2010. High inventory, low mortgage rates, and a slowly improving job market will bring more buyers off the bench. Will you be one of them? If so, there are certain things you need to know and do, before entering the market.
Here are ten signs that you are ready to buy a home in 2011:
1. You’ve made the decision to buy on your own terms.
You’ve probably heard this line before: Home ownership is the American dream. This notion was created by mortgage lenders and home builders. After all, these people stand to gain if you buy into the “dream.” While home ownership certainly has some advantages, it’s not a one-size-fits-all scenario. Buying a home makes sense for some folks, but not for others.
So if you’re planning to buy a home in 2011, you need to make sure it’s for your reasons — and not because someone else is selling you the dream. How will becoming a homeowner change your lifestyle? Will it make things better or worse? Do you have the financial stability that’s needed to buy a house? Or do you expect some job transition in the near future? Is home ownership even a priority for you? Answering these questions will help you gauge your emotional and financial readiness to buy.
2. You’ve been watching home prices in your area.
What’s the real estate market doing in your neck of the woods? This is something you need to know, before you pour your resources into a home purchase. Are you buying a home in a city that had a big bubble / bust over the last few years? If so, there’s a chance home prices will fall even further throughout 2011.
Or maybe you live in one of those fortunate few cities that experienced stable home prices, even during the housing bust. In that scenario, there’s a better chance your investment will hold (or gain) value in the coming years.
The point is you have to know what’s going on in your local market, before buying a home in 2011. You obviously can’t predict the future. But with an eye on the past and present, you can at least make an informed decision about your home purchase. This is what professional investors do, and it’s what you should so as well.
3. Home prices are stabilizing in your area.
This is an extension of item #2 above. The worst-case scenario is to buy a home in a declining market, where home values are still dropping. The best-case scenario is to buy at the “bottom” of the market, so you can ride the upward climb. In between the two is where price stabilization occurs. Almost every city in America suffered from housing depreciation after the 2008 collapse. Some of those cities have stabilized already, and a few are even seeing appreciation. But home prices in many more cities are expected to decline in 2011.
If you’re in it for the long-haul, this might not be a big deal. Home values will head north again, sooner or later. But if you only plan to be in the home for a few years, you should avoid buying in a market that’s still declining. The savvy home buyer will wait until prices are stabilizing, before venturing into the market.
4. You’re putting money aside.
The days of reckless lending are behind us. For now, at least. That means the days of “zero-down mortgages” are also history. The VA and USDA loans are the only options for 100% financing these days. But those programs are limited to certain types of borrowers. Everyone else will need to make a down payment of some kind. When you buy a house in 2011, lenders will require you to have some skin in the game. For an FHA loan, you could put as little as 3.5 percent down (if your credit score is above 580). Most conventional mortgages will require at least 5 percent down.
The down payment is just one of the costs you’ll incur when buying a home. You’ll also have to cover your closing costs, and these can add up to $2,000 – $5,000, depending on where you live. Your lender will probably require you to have some cash reserves in the bank as well, above and beyond your closing costs.
Many first-time home buyers are caught off guard by the amount of money they have to spend. Don’t be one of them. Spend some time researching the full cost of buying a house in your area, and start saving your money early.
5. You have a FICO credit score north of 600.
When it comes to mortgage approval, credit scores are more important today than in the past. This will be a key factor when taking out a loan to buy a house in 2011. In the current mortgage market, this single item can make or break your chances of getting a mortgage loan.
Maybe you’ve heard that the FHA allows you to have a credit score as low as 500, when using the FHA loan program. That may be true, but it’s sort of a moot point. You still have to be approved by an FHA-approved lender, and they won’t approve you with a score that low. In fact, two of the biggest lenders recently increased their credit requirements for FHA loans — from 620 to 640.
Having good credit will help you get approved for a loan. But the benefits don’t end there. A person with an excellent credit score will also qualify for a lower interest rate, which can add up to huge savings over the life of the loan.
6. You’ve established a home-buying budget.
Believe it or not, you can get approved for a mortgage loan that’s too big for you. It’s not as common today as it was during the housing boom. But it still happens. So before you start talking to mortgage lenders, you need to establish a monthly housing budget. This budget should factor in all of the other debts you have. The two biggest reasons for foreclosure are loss of income and poor budgeting. You can’t always control the first item, but you can certainly control the second. So do the math in advance.
7. You’ve researched your mortgage options.
Which is better for your situation, a fixed or adjustable-rate mortgage? This is one of the first things you’ll need to decide, when taking out a loan to buy a house. A lot of it depends on your long-range plans. Fixed-rate mortgages are better for longer stays, while an ARM loan can be used to reduce interest costs during a shorter stay.
Many of the mortgage horror stories you may have heard come from people who used ARM loans improperly. They stayed in their homes beyond the first adjustment phase, and they subsequently saw their mortgage payments swell. What can we learn from these people? That it’s critical to understand the different types of home loans, and how they work.
And what about these FHA loans you’ve heard so much about? Are they a good option when buying a home in 2011? Again, this will depend on your particular scenario. In many cases, the FHA loan can be an excellent path to home ownership. But they have their disadvantages as well (and you can learn about them here).
I recommend that you spend at least a week researching these topics, before you contact any lenders. Yes. It’s that important.
8. You’ve been pre-approved for a mortgage.
Mortgage pre-approval is when you sit down with a lender to see what options you have. The lender will review your financial situation and tell you how much they’re willing to lend you. Getting pre-approved for a home loan is useful for several reasons. It will help you identify any financing obstacles, such as income or credit problems. It will also make sellers more inclined to take you seriously.
It’s harder to qualify for mortgage financing these days. Most homeowners know this. As a result, they probably won’t entertain offers from a buyer who lacks a pre-approval letter. When we sold our house in the summer of 2010, my wife and I got an offer from some buyers who hadn’t been pre-approved by a lender yet. We basically ignored it, and accepted a qualified buyer’s offer two days later. Their agent should have told them not to waste our time, or their own.
9. Your debt doesn’t eat up too much of your income.
When buying a home in 2011, you can rest assured the lender will put your finances under the microscope. Your debt-to-income ratio (or DTI) is one of the first things they will examine. This is a comparison between the amount of money you earn each month, and the amount you spend on your various debts.
The maximum allowable DTI ratio will vary from lender to lender. It also depends on the type of loan you’re using. There are actually two types of debt ratios. One includes your housing costs as well as your other debts. This is known as the back-end ratio. The other one, the front-end ratio, only includes your housing debt. Here’s what you really need to know. If your combined debts (including your mortgage payments) account for more than 36 percent of your gross monthly income, you might have trouble qualifying for a loan.
10. You’re considering bank-owned homes, as well as the “regular” homes for sale.
When shopping for a home, you shouldn’t ignore the bank-owned foreclosures that might be available. These homes can often be purchased for less than their true market value. And many of them are in decent shape, having been lived in right up until the foreclosure took place. In some places (like California and Florida), bank-owned properties make up more than 20 percent of the housing inventory.
Many buyers are afraid of bank-owned homes. Perhaps they’ve heard a horror story about the buyer who went back and forth with the bank for six months, before walking away from the deal. But in reality, buying a bank-owned home is generally the safest bet (out of all the foreclosure stages). And given the fact there are many of these homes available, you shouldn’t rule them out. Most real estate agents are familiar with the process. How could they not be? So keep them in mind, when you’re shopping for a house in 2011.
The basic process of buying a home is the same in 2011 as it was in 2000. But many of the lending rules and requirements have gotten tighter. So the modern home buyer must be knowledgeable and realistic. I hope this article has given you some firm footing to start your journey.