We’re coming up on the busy season in real estate. Spring is the most popular time of year to buy or sell a home, and if you’re planning to make a purchase in the next several months, here’s what you should do to get ready.
Get your finances in order
For most, the biggest hurdle ahead of purchasing a home is the finances. Even if you have the funds at hand, it can be hard to know exactly what to do first. If you’re buying a home this spring, keep the following things in mind:
Downpayment and closing costs
Conventional mortgages require a downpayment of 20%. In Raleigh, the current average home price is $414,949. 20% of that is about $82,990—and you’ll also need to factor in 3-5% of the purchase price to put toward closing costs.
That sum might seem large—especially if you’re a first-time homebuyer without the equity of another home to fund your purchase. But if you don’t have 20% for your downpayment, don’t give up. There are other financing options with lower down payment requirements. For example:
FHA loans require as little as 3.5% down
USDA loans require as little as 0% down
VA loans require as little as 0% down
Each of these programs has different requirements that can include the type and location of the home as well as income limits, credit score minimums, and more. Talk to your lender to see which is right for you.
Also keep in mind that if you go with a loan with a less-than-20% downpayment, you’ll probably have to pay mortgage insurance with your monthly payment.
Debt-to-credit and debt-to-income ratio
Your debt-to-credit ratio is the difference between the amount of debt you have and the amount of credit you have available to you. Before applying for a home loan, you’ll want to pay down your debt so that the ratio is 30% or less. Lower is better.
Your debt-to-income ratio is the amount of money you pay toward your debts each month versus the amount of money you receive as income. For conventional loans, you should be paying no more than 45% of your existing income toward debts each month (though some lenders ask for a lower ratio, and some accept one that is slightly higher). If you’re currently paying more than that, you should eliminate some of those debts before applying. That will make it easier for you to get approved and easier for you to make your monthly mortgage payments.
If you’re getting ready to buy, you’ve probably been working on your credit score for quite some time. Keep in mind that most lenders require a minimum credit score of 620—but that’s only a minimum. To get the best interest rate possible, you should aim for a credit score of 740 or higher. If you’re close, it’s worth working on it for an extra month or two to get a lower interest rate.
Had credit struggles in the past? That doesn’t necessarily exclude you from getting a mortgage. Most FHA lenders will offer FHA loans to qualified applicants with credit scores as low as 580. Some lenders will accept lower—but you’ll have to search for them. However, if your credit score is on the lower side, waiting to buy and working on your credit in the meantime is still the best call. That will help you get the lowest mortgage rate possible and save you money in the long run.
After you feel confident about the state of your finances, it’s time to get pre-approved for a home loan.
A pre-approval letter serves a few purposes. The first is for you to know how much house you can afford. This will help you budget your home purchase and make a realistic list of must-haves. Then you and your real estate agent can start searching for matching homes in your price range.
Getting a pre-approval letter can also speed up your closing process. Since banks require the same financial information and documentation for preapproval that they do for the final approval, getting your preapproval letter early on prevents you from having to gather and submit it later—and you won’t have to wait as long for it to be processed.
Finally, a pre-approval letter will also tell sellers that you’re serious about making a purchase—and that you’re qualified. It’s possible to submit an offer on a home without one, but including your letter lets a seller know that you’ve already taken steps with a lender and are likely to get final approval on your mortgage loan. In a tight market, small advantages like this make a big difference in homes with multiple competitive offers.
How do you get preapproved for a home loan?
The first step is getting in touch with a lender. Looking for a trusted lender in Raleigh? Get in touch with us.
You’ll need to fill out an application and provide the lender with supporting documentation. Which documents? Your lender will tell you—but usually, it includes tax and employment information from the last two years, pay stubs, bank statements, and evidence of your available funds.
When should I get a preapproval letter?
In general, preapproval letters are good for up to 90 days (after which you’ll have to submit a new application). That means that if you’re planning to buy a home this spring, you should get preapproved as soon as your finances are ready.
Get the right real estate agent
Hiring an excellent real estate agent is your key to finding your dream home in your price range. It’s not just the superb negotiation tactics or the expert industry knowledge, either. The best real estate agents have expansive networks and local connections that run deep. The right real estate agent can connect you with lenders, builders, home sellers, and more—and can connect you with off-market listings you wouldn’t find otherwise.
Ready to start shopping? Need some help preparing to buy this spring? Fill out the form below. The Coley Group is the #1 Compass team in the Triangle for a reason, and we didn’t get into the top 1% of agents nationwide on accident. We’re standing by to make your real estate goals a reality—just tell us when.
When you're ready to buy, we're here. Give us a call today at 984-400-9263 to find out how we can help!