By Lindsay Goldwert
MarketWatch has highlighted these products and services because we think readers will find them useful. We may earn a commission if you buy products through our links, but our recommendations are independent of any compensation that we may receive. Amid the pandemic, low interest rates and the lure of working remotely in a home with a backyard and endless closets drove millions to purchase homes. This year, even as the pandemic eases and many return to the office, interest rates remain low ( check out the lowest mortgage rates you can get now here ) and plenty of buyers are still hoping to buy a home.
If you’re one of them, it’s important to know that you’ll face competition: Robert Heck, head of origination at the online mortgage marketplace Morty , says that “aggressive offers” are “increasingly common,” which means that buyers must be prepared to move quickly and decisively as [they] house hunt.” Here are eight things you need to do to get ready to buy a house.
1. Get your credit score in shape, and a down payment in the bank
If you want the best mortgage rates , you’ll need to have a high credit score, ideally upwards of 700. You can find out your score for free using a site like Credit Karma . To improve your credit score, be sure to pay all bills on time, keep your debt levels down and don’t open too many lines of credit at one time.
You’ll also want to have a down payment in the bank. A good rule of thumb is to save 20% of the purchase price of the house you might want, though, depending on your lender and type of loan (an FHA loan for first-time buyers only requires a 3.5% downpayment), you might need less. Note that you ideally don’t want to spend more than about 28% of your gross income on housing expenses. ( You can check out the best online savings options here .)
2. Get preapproved for a mortgage If you’re not already pre-approved for a mortgage, go ahead and do that. ( You can compare lenders and rates to get a preapproval here .) That pre-approval letter will be effective in getting a seller to pick your offer because they’ll be fairly certain you will be able to get a mortgage.
“Going through this process first and well in advance of actually viewing a home can also help level set expectations of what they will be able to buy,” said Katie Barish, executive vice president at Rocket Mortgage.
3. Take choosing your realtor seriously
Don’t be blinded by bright red blazers, dazzling websites, and pushy salesmanship. “ Your realtor should have years of experience helping buyers and negotiating effectively on their behalf,” said Heck. “It’s also important to understand how your realtor interacts with the other parties involved in the purchase and how many clients they’re working with; you want them to have the time to spend with you amid today’s tight market.”
4. Be honest about your employment
It can be awesome to switch from full-time work to freelance or a self-employed lifestyle. That is, until you have to apply for a mortgage where the company may want to see two years of steady income. There’s a temptation to fudge hiring dates and do a bit of magical math to make it seem like you’ve been employed at times when you were not. This is not a wise idea.
“It’s critical to be fully transparent with lenders about income and employment,” said Heck. “Sharing as much as possible up front will prevent delays down the line and reduce the risk of losing an earnest money deposit.”
5. Understand that getting a mortgage is a process
You found the house. You’ve got your down payment ready to go. So what’s the holdup with your mortgage lender? Homebuyers are often shocked at how much paper, and how many people, are involved in closing a loan, said Heck.
While there are more modern and digital options to ease the pain now, the mortgage industry remains old school. This means you have to stay organized, be patient, and yes, know how to use a fax machine, if needed. Shop around for your mortgage here .
6. Learn the lingo
Know the ins and outs of your mortgage terms to ensure you keep on track and stay within the boundaries of the agreement. On top of it being a major transaction, reading the fine print helps one understand how their monthly payment may fluctuate over time.
“For example, if property taxes are covered in an escrow account, the client may see an increase in their payment as the taxable value of the home rises,” says Barish. “If the client is on an adjustable-rate mortgage, the note will break down the terms of when the rate might adjust.”
7. Know your closing costs
Wait, you have to pay more ? Closing costs typically range from 3%-6% of the home price and do not include the homebuyer’s down payment. It’s important to know there may also be additional costs when buying a home such as purchasing a homeowners insurance policy and pre-paying property taxes into an escrow account.
“Closing costs cover a wide range of final processing items that come up when a client has chosen the home of their dreams, their offer is accepted and the mortgage is at the finish line,” said Barish.