Thank you to Redfin for the following guest post.
You are about to embark on one of the most amazing and rewarding experiences that can ever come from spending money: buying a home. If you are buying a home in 2019, you should know that the entire process is not quick, but when all is said and done, there are few things more exhilarating than buying a house. This guide will help equip you with what you need to buy a house this year.
1. Check Your Credit Score
Before applying for a loan and certainly before ever making an offer on a house, you should know your credit score. Why is your credit score important? Well, it’s not only the difference between getting a low-interest rate on a home loan versus a high one, but it will also directly impact how much a bank or lender will actually loan you. There are several websites you can use to check your credit score, here are a few to consider: TransUnion, Equifax, Experian.
You can check your own score as much as once a day without affecting your credit, also known as a soft inquiry. Hard inquiries are when financial institutions check your credit score, typically when you’re applying for a loan or credit card. Hard inquiries lower your credit score a few points, so try to keep hard inquiries to a minimum.
2. Improve Your Credit Score
Maybe you just checked your credit score and realized it’s not as high as you had expected. Don’t worry, there are a few things you can do now that will help raise your credit score so you can capitalize on a great interest rate.
Though you can easily implement steps to help your credit score, fixing or raising a credit score doesn’t happen overnight. It’s imperative to start now so when you go to apply for a home loan your credit score will (hopefully) be where you want it. Here are three tips to help improve your credit score, and recommended by John Heath, Directing Attorney at Lexington Law:
“Improving one’s credit score may take time, but it can be done. Bad credit is not irrevocable,”
said Heath. “Developing good habits and repairing your credit report will help increase your
credit score so you’re able to secure a home loan or a great interest rate with confidence.”
3. Know What You Can Afford
The best way to determine how much house you can afford is to simply use an Affordability calculator. Though calculators such as these do not necessarily account for all of your monthly expenditures, they certainly are a great tool for understanding your larger financial situation.
After you figure out what you can comfortably afford, you can then start online window shopping for houses and really begin to narrow down what you want in a house versus what you can afford. Are you looking at specific neighborhoods? How many bedrooms do you want? Do you need a large yard, big deck, swimming pool, man cave, she shed, etc?
Understanding what you can afford in the area you want to buy will help keep you grounded and focused on what you actually want in a house versus what might be nice to have.
4. Save Up For a Down Payment
Unless you want to pay Private Mortgage Insurance (PMI), you really want to save up for a sizable down payment. PMI is an added insurance charged by mortgage lenders in order to protect themselves in case you default on your loan payments. The biggest problem with PMIs for homeowners is that they usually cost you hundreds of dollars each month. Money that is not going against the principal of your mortgage.
How much should you save for a house? Twenty percent down is typical with most mortgage lenders in order to avoid paying for PMI. However, there are other types of home loans, such as a VA loan if you have served in the military and qualify, that may allow you to put down less than twenty percent while avoiding PMIs altogether.
As an added benefit to having a sizable down payment, you may also receive a lower interest rate that will save you tens of thousands of dollars in interest over time. So start saving now!
5. Build Up Your Savings
Lenders like to see a healthy savings account and other investments or assets (i.e. 401k, CDs, after-tax investments) that you can tap into during hard times. What they really want to see is that you are not living paycheck to paycheck. A healthy savings account and other investments are a good idea in general as it will help you establish your future financial independence, but it is also a necessary item on your checklist of what you need to buy a house in 2019.
6. Have a Healthy Debt-to-Income Ratio (DTI)
Another key component banks and other lenders consider when issuing loans, and at what interest rate, is your debt-to-income ratio. The debt-to-income ratio is a lender’s way of comparing your monthly housing expenses and other debts with how much you earn.
So what is a healthy debt-to-income ratio when applying for a home loan? The short answer is the lower the better, but definitely, no more than 43% or you may not even qualify for a loan at all. There are two DTIs to consider as well.
The Front-End DTI: This DTI typically includes housing-related expenses such as mortgage payments and insurance. You want to shoot for a front-end DTI of 28%.
The Back-End DTI: This DTI includes all other debts you may have, such as credit cards or car loans. You want a back-end DTI of 36% or less. A simple way to improve this DTI is to pay down your debts to creditors.
How do you calculate your DTI ratio? You can use this equation for both front-end and back-end DTIs:
DTI = total debt / gross income
7. Budget for Extra Costs
There are a lot of little costs that go into buying a house that are overlooked by new home buyers all the time. Though there are some things, such as sales tax and home insurance, that can be wrapped into a home loan and monthly mortgage, there are several little things that cannot be included into the home-buying package and need to be paid for out of pocket.
Though these items can range in price depending on the area, size and cost of the house your buying, here is a list of extra costs you should consider (not all inclusive):
*Closing costs can sometimes be wrapped into the home loan, depending on the agreement with your lender.
**Property taxes and home insurance can be paid separately or your lender could include it into your monthly mortgage payment.
8. Don’t Close Old Credit Card Accounts Or Apply for New Ones
Closing a credit card account will not raise your credit score. In fact, in some cases, it may actually lower it. Instead, try to pay down the balance as much as you can, while continuing to make your monthly payments on time. If you have an old credit card you never use anymore, just ignore it, or at least don’t close it until after you have purchased your new home.
Opening new credit cards before buying a home is also not a good idea. You don’t want creditors checking your credit or opening new cards under your name, as you may lose some points on your credit score.
The absolute worst thing you can do is max out one of your credit cards, even if the limit on the card is low. If you do, your credit score may plummet. Try tackling your credit cards with the highest interest rate first, then as one gets paid off, focus on the next card until you’re free and clear.
9. A Solid Employment History
If you haven’t gotten the picture yet, lenders like consistency, including your employment history. Lenders like to see a borrower with the same employer for about two years.
What if you have a job with an irregular or inconsistent pay schedule? People with jobs such as contract positions, who are self-employed, or have irregular work schedules can still qualify for a home loan. A mortgage known as a ‘Bank Statement’ mortgage is becoming rapidly popular with lenders as more self-employed or what has been referred to as the ‘gig economy’ has taken off.
10. Know the Difference Between a Fixed Rate and an Adjustable Rate Mortgage
The difference between these two types of mortgage rates really lies within their names. A fixed rate loan is exactly that, an interest rate that will never change the moment it’s locked in. You will pay the same amount the very first month you pay your home loan and will continue to pay that same exact amount over the course of thirty years (or however long the loan term is).
An adjustable-rate mortgage (ARM) is typically a mortgage that starts out as a lower rate than fixed interest rates but then is adjusted each year typically resulting in a rate higher than a fixed rate. A 5-1 ARM is a popular mortgage offered by lenders, which is a hybrid between fixed and adjustable rate mortgages. Your mortgage would start out at a lower fixed rate for the first five years, then after that time period has elapsed, the rate would then be adjusted on an annual basis for the remainder of the loan term.
11. Follow Interest Rates
It is important to know what interests rates are doing. The big question is are they on the rise or are they falling?
When the economy is good the Federal Reserve typically raises the interest rate in an effort to slow down economic growth in order to control inflation and rising costs. When the economy is in the dumps the Fed does the exact opposite. They lower the interest rate in order to entice more people to make larger purchases that require loans (i.e. land, cars, and houses) to help stimulate the economy.
As new soon-to-be homeowners, it’s a good idea to know how the overall economy is doing, and more importantly, how it’s impacting the interest rates you’ll soon be applying for. In 2018, after years of bottom of the barrel interest rates, the Fed raised interest rates three times and is projecting to raise it three more times in 2019.
Why are small hikes in interest rates so important to you? To put it into perspective, even a one percent increase in your interest rate on a home loan is the difference of paying or saving tens of thousands of dollars in interest payments on your home loan over time.
12. Know How Much Time it Takes to Buy a House
The home buying process from start to finish is time-consuming and very relative to individual circumstances and the housing market in your area. However, there are some general universal constants that you can expect, such as a cash offer on a house is usually much quicker than a traditional loan, and if there is a perfect house in a good neighborhood and at a great price, you better expect competition and added time for a seller to review offers.
Depending on the housing market in your area and possibly which season you’re buying in, it can take you a couple of weeks to find a home or more than a year. But after you find your home you can typically expect the entire process from making an offer on a house to walking in its front door, to be as little as a few weeks to a couple of months on average.
13. Find a Knowledgeable Real Estate Agent
There are several ways to find a knowledgeable real estate agent. Many people rely on recommendations from friends and family, while others look to online reviews. While both of these scenarios work really well and can land you a great real estate agent, the reason these agents rise above the others as the best of the best or the crème de la crème is because of their intentions.
A good real estate agent isn’t trying to get you into a house as quickly as possible so they can earn a commission. Instead, you want an agent that will act as your guide through the home buying process, while having your best interests in mind. A good agent will be able to tell you straight if they think a house is a good fit for you, or if you should keep looking. They should also be expert negotiators so that you get the best deal possible.
14. Find a Mortgage Lender
There are a few things to keep in mind when researching a mortgage lender. The first thing that comes to most people's’ minds is what mortgage rate can they get. You may have to shop around to find the best rate because lower the rate the more money you save.
Secondly, how does that mortgage lender rate compared to other lenders? By looking at positive and negative online reviews you can usually establish a theme pretty quickly of the strengths and weaknesses of the lender, and what you can possibly expect for a level of service down the road.
Ask the lender what their average length of time is to close on a house after the offer has been accepted? A good lender versus a bad one can be the difference of moving into your new home two to four weeks earlier. You want to find out how streamlined their processes are.
15. Get Pre-approved
When being approved by a mortgage lender, you should be aware that there is a small but relevant difference between the typical fast preapproval for a home loan versus an underwritten pre-approval.
The fast pre-approval usually encompasses a credit report and a loan officer review and can be done in less than a couple of hours. This basic pre-approval allows you to quickly know how much you can afford and then make an offer on a house that may have just come on the market.
The underwritten pre-approval usually takes about twenty-four hours and includes a credit report, loan officer review, underwriter review, and a compliance/fraud review. Though this process takes longer, your offer on a house is actually stronger. Eventually, if you’re planning on buying a house, you will have to go through the underwritten pre-approval process anyway, so it’s better to jump on it from the start.
16. Research Neighborhoods or Areas You Want to Live
There are many variables to think about when researching your future residents. The key to beginning your research is to determine those variables most important to you. Are you looking for a good school district, a large house, convenience to commuter options, or a specific neighborhood that is extremely friendly and ranks high on Walk Score?
Your real estate agent will most likely tell you to figure out your list of the things you absolutely want in a house versus the extra features that you would like to have, but wouldn’t deter you from a house if it wasn’t there.
Your list will help your agent narrow down the number of houses they’ll show you, saving you time by only showing you houses you’d actually be interested in.
17. Shop For Your Home and Make an Offer
Now that you know where you want to live and you’re pre-approved, the fun begins. You get to look at houses! Once you find the house you know would be a great fit for you and your family, you’ll want to make an offer.
There are numerous variables to consider and hopefully, your knowledgeable real estate agent will help you through this process. Understanding the market conditions, how houses have been selling in the neighborhood and at what price (above or below asking), and knowing if there are other competing offers will help you assess and determine how you’d like to make an offer.
Negotiating an offer on a house can be emotionally taxing, so do your research and rely on your agent’s advice so you come to the table prepared.
18. Get a Home Inspection
Congratulations are in order! The sellers have accepted your offer. Now you want to get the home inspected to make sure there are no underlying issues that could cost you thousands of dollars down the road, such as a bad roof or foundation. Usually, a home inspection is a contingency built into the initial offer, and your real estate agent will help you set this up. Though you can waive this contingency if you’re trying to make a competitive offer in a hot market. Just be aware that if you do waive a home inspection contingency, you may be taking on considerable risk.
There are several types of home inspections, but in general, a typical home inspection involves a certified inspector that will go in, around, under, and top of your house looking for anything that could be of concern. Though they will go into crawl spaces and attics as part of their inspection, they will not open walls to see if the plumbing or electrical is good. However, they look for signs that could possibly point to those issues.
Then they will put their findings into a nice little booklet for you with pictures that basically becomes a miniature instruction manual for your house. If there are fixes that need to be addressed, they will certainly let you know.
19. Have the Home Appraised
Home appraisals are an important part of the process because oftentimes house prices can quickly skyrocket when the housing market is hot, and banks do not like to loan out more money than what a home is worth. A home appraiser will not only tell you what the home is actually worth for the area and for the current housing market, but this appraisal will also directly affect the size of loan the bank will give you.
If the home appraisal comes back and states that the house is worth $300,000, but you made an offer of $310,000, the bank will most likely only lend you $300k. You will then either be stuck with paying the additional $10k out of pocket, or you may try to renegotiate the price with the sellers to see if they would be willing to come down. Or you may lose the house altogether.
Also, the mortgage lender will usually set up the home appraisal so you can take this time to focus on other home-buying tasks that need to be finished up.
20. Close the Sale and Sign The Papers
Congratulations, you’re a homeowner! Your real estate agent should help you map out the last details, such as when and where you should sign all the papers to take ownership of the house and, of course, the handing over of the keys. Welcome to your new home.
You’ve gone through the prep, the staging, the open houses and the showings. Several families have come through your home and you have an accepted offer on the table. This is an exciting time for many home sellers who are near the end of the selling process.
In most cases, one of the remaining hurdles is the home inspection. There are a few things that a home seller can do to prepare for the inspector’s visit. Taking the time to prepare things for the inspection can make this final step go much more smoothly. Here are a few things that a seller can do that will assist the inspector and might even help your sale.
#1 – Have your paperwork together
It is a great practice to keep a folder and log of all maintenance, repairs and improvement for the house with dates of service, contractors, contact information and warranties and manuals. The inspector can use this information to review dates and maintenance performed. Additionally, it shows an extra amount of care and diligence that you take in keeping track and taking care of your house. A home inspector will often cite the age of the furnace or appliances based on the serial numbers, which tell you when they were manufactured. Sometimes those appliances are installed a couple of years later, so having installation dates recorded is a way of showing a couple of more years of expected use than going strictly by the year that it was manufactured.
#2 – Clean the house
First impressions are everything. When an inspector walks into a messy, dirty house the first thought in their mind might be that the lack of cleanliness is a signal that the home is not well maintained. The house is probably already mostly spotless after it has been prepared for open houses and showings but make a full sweep through the home to clean up the clutter and the spills to give that great first impression.
Most inspectors are not going to comment on the cleanliness of a house because it has nothing to do with the condition of the house. Although, I did hear a story about an inspector noting in his report that kids’ toys all over the floor were a possible tripping hazard. Last time I checked, the clutter does not come with the house. I’m not sure if the inspector was trying to be funny, but a home inspection report is not necessarily the place for humor.
#3 – Change those light bulbs
A home inspector will turn light switches on and off to check the switch and the light. If there is a burned-out bulb, the report may bring that light or switch and its circuitry into question. The inspector will be able to quickly note that the circuit works as expected if the homeowners replace the bulbs before the inspection.
Likewise, it is helpful to know if a switch controls a wall outlet, and what outlets it controls. Plug a lamp into any outlet that is controlled by a switch and turn the lamp on, so that it will light up when we flip the switch. Inspectors can usually figure it out as they go, but sometimes we don’t and it can eliminate a potential red flag in the report. Some inspectors may not take the time to determine what the switch controls and will note the questionable light switch and/or outlet in their report.
Lastly, make notes if there are any odd electrical situations in the house so that the inspector is aware. I inspected a house early in my inspection career where there was a switch in the kitchen, that when I turned it on nothing seemed to happen. Later, I tested the dishwasher and that didn’t work. It turned out that the switch on the wall controlled the dishwasher. If I had not figured that out my report would have described a wall switch that either did not work or had a burned-out bulb, as well as a dishwasher that would not run.
#4 – Make things accessible
Make sure that you leave plenty of workspace for the inspector to effectively do their job. Clear a space around the furnace, hot water heater, electrical panel, and any other appliance or utility around the house. The inspector will need to be able to freely and safely inspect these items – a 3- to 4-foot radius around the front of the appliances is usually adequate.
An important access point that is frequently blocked is the attic access. The access is often located in the ceiling of a bedroom or hallway closet. Clear out your closets to make sure that there is clear access to the opening. The inspector is going to need to place a ladder up to the opening so that it can be accessed, so it is best for the closet to be completely emptied to allow for unobstructed access.
Most inspectors will move items that block their access to these important inspection points. If you don’t trust a stranger handling your personal belongings, clear the area before the inspector arrives.
#5 – Take care of your pets
I love most pets. But, even the friendliest dog or cat can be a hazard or a hindrance to a stranger in your home. Plus, I am not the only person at your house for the inspection. The buyer and buyer’s realtor will probably be there as well, and they might not be as comfortable with the family cat rubbing against their leg. If you need to leave your furry family members at home, put them in a kennel so that they do not bother the inspector. A worst-case scenario is when an inspector does not know that there are pets in the house, and they escape and run when the doors are opened.
#6 – Leave the keys
Make sure to provide a key or other means to allow access to any garages, sheds or other detached buildings on the property. The inspector is going to want to take a look around these on behalf of their clients. Also, be sure that all interior doors are unlocked and that all rooms are accessible.
#7 – Find somewhere to go
You don’t need to be available for the inspection – in fact it is usually preferred that the owner is not at home. It is likely that the buyer, buyer’s realtor and the inspector will all be there and your presence can make some of the conversations between the buyer and representatives uncomfortable. We need to be able to freely discuss the inspection. Expect to be out for about 3-4 hours – take in a movie or go shopping to kill the time. You may want to leave a phone number where you can be reached in case of an emergency.
A home inspection will go more smoothly if the owner has prepared the house for the inspector to perform the work without too much disturbance or impediment. Some preparation by the homeowner can even contribute to a more positive evaluation of the overall condition of the house, such as replacing light bulbs or providing service and installation records. The ultimate goal is to sell your house, so that alone should be worth the extra hour or two spent helping the buyer with their home inspection.
Indications of Water Problems
One of the first things that you might notice that indicates you have possible moisture issues will be a musty smell in the basement. This can be your first clue that a bigger problem exists or is coming. Other indicators of moisture-related problems are:
Seepage Through Basement Walls and Floors
One of the most common and troubling sources of water in a basement is seepage through the basement walls and floors – usually during and after heavy rains. The leaks can come from moisture permeating through the walls, or from water freely passing through cracks in the foundation. Below ground leaks often end up with saturated carpets and rugs or standing water on the floor. These problems can be the most frustrating for a homeowner to fix. But, they can be much less daunting if you understand how the leaks happen.
A common problem is poor grading around the foundation of your home. The soil placed right next to the foundation walls is normally not as well compacted as the rest of the soil, so this creates a zone where water can flow more freely into the ground next to your house, and store more water because the soil is not as densely compacted. This area that is not as well compacted will settle over time, reducing the slope away from the house. Some homeowners might excavate around the foundation for a garden or other landscaping, which can create an area where water cannot freely flow away from the house. These are all sources of water in the ground next to the foundation, which can lead to water in your basement.
Roof drainage is another source that can add a significant amount of water along your foundation. Roofs with no or clogged gutters discharge a lot of water right next to the house, and gutters with missing or damaged downspouts can do the same. Much of this water can seep into the soil surrounding the house and end up in your basement, especially if you have inadequate drainage away from the house.
Surface drainage repairs can reduce or eliminate many basement water problems. The ground should be sloped at 1 inch per foot, or steeper, for the first 5-10 feet away from the foundation and continuously sloped away from the house beyond that. When grading around the house, make sure to maintain a separation from the soil and any non-concrete wall surfaces to prevent other problems. If there is a garden or landscaping, there should be a way for water to escape and flow away from the house. Keep your gutters clear and the discharge downspouts should be at least 5 feet away from the house, directed to a location where the flow will continue to drain away from the house.
If improvements to the surface drainage around your house don’t do the job, a subsurface drainage system may be needed. The most effective, but also most expensive, is to install drain tile system around the exterior of the foundation. The drain tile is connected to a pump to discharge the water away from the house.
An interior drain tile, installed under the basement floor around the perimeter of the foundation, is another effective means of removing the water from your basement. This system is installed by breaking through the concrete floor around the perimeter of the basement and installing the drain tile with a bedding of washed rock. The drain tile is connected to a sump which has a pump to discharge the water away from your house.
Simple humidity can be a significant source of moisture in basements. A major source of indoor humidity is open windows letting in the moist summer air. Indoor humidity also comes from cooking, showers, humidifiers, or unvented driers. The hot, humid air condenses on cold water plumbing, and colder walls and floors. A full-time operating dehumidifier can significantly reduce the humidity. Other methods of reducing that humidity are installing or repairing any leaks in dryer vent pipes, running bathroom or kitchen fans when showering or cooking, and reducing or eliminating the use of humidifiers in the summer.
Plumbing leaks can be another source of water in the basement. Plumbing leaks can come from water supply or wastewater pipes, faucets, appliances, or sinks or tubs. Two common plumbing leaks in homes are tile showers and the water and ice maker connections for the refrigerator. It is important to repair the leak or replace the defective item after you have figured out where its coming from. Even if you need to cut a hole in the wall or ceiling somewhere, a prompt repair of a plumbing leak can save you from much bigger problems in the future.
Leaks from Above
Exterior above grade walls can leak where the wall covering is damaged or deteriorated, or along wall penetrations. Wall penetrations include anything that is installed through a hole in the siding, such as doors, windows, electrical conduits, or vents. Water can also leak through masonry siding such as brick or stucco. These leaks may seep through the wall and run down the exterior wall, presenting themselves by the presence of stains or drips near the top of the block basement walls.
Leaks in the walls need to be addressed from the source of the leak. Leaks around windows or other wall penetrations can often be repaired with some exterior caulk or sealant around the opening. These leaks can sometimes be easily identified by the condition of the existing sealant. Always completely remove the old sealant if you are repairing the caulk and make sure to completely seal the opening.
Leaking brick walls can be repaired by replacing any damaged bricks, or a job called tuck pointing to repair deteriorated masonry in the joints between bricks. Small cracks in stucco can be repaired with a mixture of sand and exterior caulk and finished with a paint to closely match the existing surface. Larger holes in stucco need to be repaired with new stucco and painted to match the existing walls. For the usual micro-cracks that most masonry products have, there are several sealant products that can be sprayed or brushed on that can seal the small seepage pathways in the walls.
Cracked or damaged aluminium, vinyl or wood siding can be replaced one piece at a time or can be patched with sealants or matching materials. The patch, even if it is the exact same product and color as the original installation, is likely to not be an exact match due to the weathering on the siding on your house that has been exposed to the elements for a period of time.
Moisture in your basement can first appear to be a daunting problem but is often remedied with much less expense or effort that you might expect. If you have a water issue, the first step is to determine where it is coming from. You can come up with a game plan after determining the source. It is important to address these leaks as soon as possible after they are identified to prevent other, more costly and significant, damages. If you have a drip or leak and are having a hard time figuring out where it is coming from, give us a call at (612) 325-5131 – we would be happy to help you protect your investment.