Homebuyer 2.0: New market, new rules
In the ever changing world of real estate, many housing markets have subtly shifted from a buyer's market to a seller's market. Homebuyers who once had the upper hand are now competing for properties in many markets.
Increased competition means homebuyers need to be more prepared than ever. Today's homebuyers also need to know exactly what they want and need in a home before they start looking. Experts say this is a return to the traditional way of judging a home's value.
According to the National Association of Realtors, national housing inventory declined again in November to 2.03 million existing homes for sale, which represents a 4.8 month supply of homes at the current sales pace. This is the lowest housing supply since September 2005 and 22.5 percent below the available housing one year ago.
"In addition to preparing financially to buy a home, buyers need to be mentally prepared to understand that the market is not as buyer-friendly as it used to be," says Ron Sitrin, a Realtor with Long & Foster Real Estate in Washington, D.C.
Buyers must be more prepared than ever
Homebuyers have always needed to be financially prepared to buy, but today's buyers need to have a complete mortgage approval in place before they start seriously looking for a home.
"You have to start with the financing because sellers won't accept an offer without a mortgage approval letter from a reliable lender," says Natalee Kelaher, a Realtor with Better Homes and Gardens Real Estate Gary Greene in Houston, Texas.
Since lending conditions are only seemingly getting tougher, Sitrin says that prospective buyers should check their credit score as soon as they are thinking about buying, because fixing even a minor credit issue can take 60 to 120 days to correct.
According to Ellie Mae, a company which develops software for mortgage servicers, the average FICO score for an approved conventional purchase was 764 in November 2012 (up two points from October). The average credit score of a denied conventional purchase was 736 (again, two points higher than October).
Joanne Liscovitz, a Realtor with Coldwell Banker Residential Brokerage in Hillsborough, N. J., says buyers also need to be prepared to provide extensive financial information -- such as pay stubs, tax returns, deposit documentation, asset statements and more -- to their lender.
"They need to do this before they look for a house so they aren't doing it at the last minute," she says.
Additionally, prospective buyers need to work with a lender to estimate their total cash needs for the home purchase.
"You'll need money for an earnest money deposit, a down payment, a home inspection, an appraisal and some upfront lender fees," says Kelahar.
An earnest money deposit is money you deposit on a home you make an offer on. Earnest money deposits are proof to a homeowner that you are serious about buying their house. The amount you should deposit varies widely according to your local market, generally from 1 percent to 5 percent of the offer and sometimes as low as $500. Your real estate professional can help you determine an appropriate deposit in the context of your market and your down payment. The deposit is then later put towards your down payment and closing costs.
An important part of being financially ready to buy is to know what you can afford.
"Buyers need to know how a sales price translates into a monthly payment, because that's the most important number to figure out how much you want to spend," says Sitrin.
To calculate your projected monthly payment, enter a few simple figures -- loan amount, interest rate, loan term -- into a mortgage calculator to see what you'll be paying.
Judging value the traditional new
To both gauge the true value of a property while saving time in the process, homebuyers should know exactly what they want in a home before they begin looking at homes.
"It's important for buyers to get a sense of the relative value of something for them personally," says Sitrin. "The more homes they look at, the better they can understand a home's intrinsic value because of its location near one subway line rather than another or because it has a flat yard or is in the perfect school district for their kids."
"It's a process to determine what really matters most to them: a particular location or a particular type of house," says Liscovitz.
Many of today's homebuyers are back to buying homes as a long-term place to live rather than a short-term investment. If you're in it for the long-term, Sitrin suggests buyers utilize historically low mortgage rates to increase their purchasing power.
"If you understand your market and can see the relative value in the homes, you may even be willing to go a tad higher in your price range or with your offer because you realize that this one property has more of what you're looking for than the other properties you've seen," says Sitrin. "This may be the time to stretch your budget a little because interest rates are so low that your money goes farther. Instead of planning to move-up to a larger place in five years, you may want to buy it now because interest rates are likely to be higher by then and the monthly payments might be unaffordable."
Kelahar says buyers need to decide what they want and be ready to move quickly when they find it. She recommends moving fast with a full-price offer if you are purchasing in a market with low inventory.
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Michele Lerner, author of "HOMEBUYING: Tough Times, First Time, Any Time", has been writing about personal finance and real estate for more than two decades for a variety of publications and websites including Investopedia, Insurance.com, HSH.com, SavingsAccount.com, National Real Estate Investor magazine, The Washington Times, Urban Land magazine, NAREIT's REIT magazine and numerous Realtor associations.
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