If you’re anything like me, you’ve been nearly obsessed with sites like Realtor.com, hoping that miracle of miracles, the perfect affordable house would stay on the market long enough for you to snatch it up.
Last month, California real estate prices were nearly 40 percent higher than a year ago, which, to be fair, was the beginning of the pandemic when the economy was about as close to shut down as it’s ever been.
Still, today the median home price in California is more than $800,000. That’s the entire state, not just Los Angeles and the Bay Area!
The median home price for the Bay Area is more than $1.3 million, and in LA, it’s a bit better, at about $725,000. Numbers like that, along with the lack of inventory, are sure to leave a lot of people out of the housing market.
No wonder Ace Moving is relocating people from the Bay Area to cities like Sacramento. We’ve even seen a huge uptick in moves to Nevada and Arizona, where property is more affordable.
Will the housing bubble last?
As with all boom times, things will slow down. There are already signs. After nearly a year and a half of a pandemic, where there was a foreclosure moratorium and a rash of people moving to the suburbs for more space and cheaper housing, things will soon come back to normal.
That’s not to say that this is a traditional bubble housing market. We likely aren’t going to see anything close to 2008’s foreclosure crisis, but there will be foreclosures on the real estate market. Still, you should make sure you have all your ducks in a row before trying to buy a house.
Save up for a down payment to buy a house
If you have 20 percent to put down on your home, you’re an excellent candidate for a mortgage. That doesn’t mean you have to have 20 percent to put down. You can put as little as 3 percent down if your credit is good, but you will have to purchase private mortgage insurance if you have less than 20 percent equity. Don’t sink every penny you have into a down payment because you will need an emergency fund.
Before buying a house check your credit score
Your credit score is one of the most important things you should be looking at. Credit scores range from 350-800. The number is based on a few factors, including how in debt you are, whether you pay your bills on time and how much credit you have. A score of 750 or better is considered excellent and they’re the people who get all the best credit cards and interest rates.
You are allowed a free copy of your credit report once a year. Before taking the next step, make sure there are no errors.
After you check your credit score, it’s time to call a mortgage broker. Most Realtors will not work with buyers without a letter of approval from a mortgage lender that shows how much in mortgage payments buyer can afford to spend.
What does the mortgage broker look at when you want to buy a house?
Getting a letter of approval from a mortgage broker is relatively easy, but you do need to show that you can make the payments before buying a house. That means they’ll check your credit score, your income and your debt to income ratio. A debt to income ratio is the grand total of monthly payments toward your debts (including auto loans, credit cards and mortgage) divided by your gross monthly income. It used to be that a debt to income ration should never exceed 30 percent, but many lenders will allow up to 50 percent.
Play house before you buy a house
Yes, we know, you’re a grownup. Odds are you’ve managed a household for a while, even if it is a rental. What you may not have managed, though, is a huge monthly mortgage payment. Spend a month or two putting the difference between your rent and your proposed mortgage in the bank. Can you comfortably handle it with some money to spare or is it a struggle? Remember that when you own a home, the maintenance is all on you, so you should always have an emergency fund.
Find a real estate agent before buying a house
A licensed real estate agent will take the time to show you properties in your price range and desired neighborhoods, but that’s not all they do. It’s their job to help you navigate all the paperwork required for the home purchase, but not for the mortgage.
Make an offer
If you find a house you want to buy, it’s time to put in an offer. Your Realtor will help you determine how much to offer. While it is true that real estate agents earn a commission, it’s not in their interest to try to get you to bid more. They only do that if they genuinely feel the offer is too low. They might suggest that you waive contingencies, which include a home inspection. Unfortunately many buyers find that they have to wave the contingencies for their offer to be accepted. Still, it’s a good idea to have an inspection if possible before buying a house.
Don’t buy anything big
Your offer was accepted, but that’s not the end. Now is the time the mortgage lender really goes to work to make sure you can afford the mortgage payments. Now is not the time to go into credit card debt. You might be tempted to buy new furniture, but your lender is going to look more thoroughly, and if your debt to income ratio is suddenly higher, you might lose the mortgage. Remember that money we suggested you save? If you carry credit card debt, it might be a good time to pay some of that down.