Real estate experts insist that folks hoping to buy in the next year should take the time now to follow the four steps below—improve your debt-to-income ratio, increase your savings, secure the best possible mortgage rate, and find a trusted agent who is an expert in your favored cities and neighborhoods—before aiming to buy. And these aren’t just helpful tips; they’re absolutely crucial to being a competitive home buyer in this prolonged seller’s market we’re in. Any misstep could derail your best-laid plans to move into the home of your dreams. Here’s how to make it happen—and make it worth your money.
Improve your debt-to-income (DTI) ratio.
If you’re looking at a 2022 purchase, there’s still time to make sure your credit score is as high as possible. The higher the FICO credit score, the lower the interest rate on your mortgage loan. And, in addition to paying down credit card debt, it is imperative that aspiring homeowners lower their debt-to-income ratio. Seth Rouch pays cash for houses in the Denver area, and he counsels home buyers to get their financial “house” in order before entering the market for a new home, too. Rouch says that many people focus on the debt pay-down, but forget about increasing their income. “Ask for a raise,” he advises. “It’s a simple thing, but many of us are worried about doing it. Employee turnover is expensive for employers. If you’re doing a great job, show up on time, and put in the work, then most employers will reward you for that, but not unless you ask!” Proof of higher income often increases the amount a bank will lend, which might be just the leg up you need to enter a favored neighborhood or to buy your dream home. A raise will speed up debt pay-down and will increase the amount you can save for a down payment.
Save for more than just a down payment.
Chantay Bridges is a senior real estate specialist with EXP Realty in Los Angeles. She says that even once your credit score is through the roof, it is in your best interest to lower your expenses. Bridges explains that the offers for credit cards and car loans will start pouring in, and you’ll have to resist that temptation; giving in could tank your long-term goal of buying a house. Avoid anything that even sounds like a well-deserved shopping spree. “You are building for your future,” Bridges explains. “Now more than ever, you want to demonstrate that you can handle financial matters. It’s a little sacrifice today for a better tomorrow. Run far from all debt—that means shopping spree, not so much.” She says skip the name brands and go no-frills for awhile. Cut unnecessary spending. After all, buying a house is just the beginning; maintaining a house requires a different budget altogether. To prepare for new expenses, such as lawn care, plumbing fixes, and home upgrades, you’ll have to budget for much more than just the mortgage. Bridges says that it’s best to start saving now for those inevitable expenses. “I really don’t want people to jump into homeownership without a big safety net, a big emergency fund, because, as I like to say, something always breaks when you buy a house,” says real estate agent Mindy Jensen on the Money Confidential podcast. (Read the full transcript here.) “Mortgage payments are made over a period of 15 to 30 years, depending on the down payment,” says Jeff Johnson, a real estate agent and acquisition manager at Simple Homebuyers. “Before you commit, you need to calculate your budget with respect to the debt you have, if any,” he says, adding that future buyers should look into their eligibility for first-time home buyer programs, which lower the down payment, closing costs, and other fees. Now is a good time to start shopping around for mortgage loans, too. In a highly competitive market, buyers may need to show a bank pre-approval to tour homes in-person. So, use the time now to price-compare and try to negotiate even lower rates and better terms. Once you’ve found the lender that meets your needs, send in the paperwork needed to get pre-approved for the appropriate cost for a home where you want to live. “Getting a pre-approval shows you how much you are able to spend, considering your credit rating, income, and bank statements,” says Johnson. “This lets the lender know that you are in a position to afford any specific home within your financial constraints.” With that knowledge, you can find an agent who is committed to your price point and who can start searching for the right home, based on your preferences and budget. Nick Kyte, who sells luxury real estate in Ottawa, says that with help of a trusted agent, you should start learning more about where you want to live. While your agent will start emailing you listings, so you can get a feel for what you like and don’t like, Kyte says you can also do your own field work: “Walk the streets during the day, evenings, and weekends, so you get a sense of the community, the local shops, restaurants, and amenities, to see if they match with your current and future needs,” he suggests. “It’s about lifestyle, so take the time that is required to ensure you’re comfortable and can make an informed decision.” Once you’ve got the right agent in your corner, it’s just a matter of time before moving into your dream home becomes a reality.
