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| The Basics | Home buyers, start your search engines
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Prime shopping season is here. If you plan to join the house-hunting hordes, do some preparation first.
By Holden Lewis, Bankrate.com
May through August is the busiest period for home sales. Savvy buyers lay the groundwork in advance by educating themselves about the home-buying process and its terminology, checking their credit reports for errors, figuring out how much they can pay for a house, finding mortgage and real estate professionals whom they trust, and narrowing down their choices of neighborhoods.
Things tend to go more smoothly for people who tackle those tasks in that order.
"Education and pre-planning are the first steps toward successful homeownership," says Jean Mills, director of homeownership services for Nehemiah Corp., a down payment assistance provider. Nehemiah offers an online homeownership course.
First-time buyers can take advantage of online education, take courses offered by community groups or debt-counseling companies, or read books. Check out : the essential homebuying guide on MSN MOney.
Tackle your credit record
Once you understand the lingo and the steps involved in buying a house, it's time to order credit reports and find out credit scores. First, you can get an approximate range of your credit score using the FICO Score Estimator, a new free service from Bankrate.com and MyFico.com. You can order your credit reports here.
Once you get them, check the credit reports for errors such as phantom bankruptcies, accounts on your report that belong to someone else and listings of long-closed accounts that are still counted as open. Some creditors don't report positive information about you. Take steps to have the errors fixed. (Read "4 credit-scoring myths".)
Around the same time that you're scoping your credit reports, figure out how much you can pay for the house. Like everything about owning a house, this is a more complicated issue than it appears on the surface. But it's an important step, because you -- not a banker or real-estate agent -- should figure out how much you can afford to pay.
Try on a real budget
The first thing to do, says Mills of Nehemiah Corp., is to "prepare a budget and live a budget." Go through your bills and write down how much you spend in various categories. Are there categories (dining out often is a biggie) that you can cut back? Then live with that budget for at least a couple of months. (For more information, see "Get a budget, get a life.")
Now it's time to think like a banker and calculate your housing expense and debt-to-income ratios.
The housing expense ratio describes the percentage of your before-tax income that would go toward the monthly house payment, including property taxes and insurance. The old rule of thumb says the house payment isn't supposed to exceed 28% of the borrowers' income. Today's mortgage-origination software doesn't hew to that old standard, but it's a good one to live by.
The debt-to-income ratio describes the percentage of before-tax income that goes toward all monthly debt payments -- mortgage, credit cards, auto loans, student loans, child support and alimony, court judgments. Under the old rule of thumb, total debt payments shouldn't exceed 36% of the borrowers' income. Again, loan-origination software might let you qualify at a higher ratio, but you would feel financially squeezed. (For more on how much house to buy, read "Don't bite off too much house.")
Round up the professionals you'll need
Knowing these ratios isn't enough. You have to get a sense of how much it will cost to maintain a home and repair the constantly decaying beast. (This is written by a guy whose roof is being replaced for more than $6,000 as he types.) You find out by talking with people -- friends and relatives, mortgage bankers and real estate agents. (To get started, read "The hidden costs of homeownership.")
Unless you're rich enough to plop down a few hundred grand cash for a house, you'll have to find a mortgage banker. And unless you buy a house directly from the owner (a "for sale by owner" or "FSBO" transaction), you will use the services of a real estate agent. First-time buyers, especially, might find that the process goes more smoothly with the help of a Realtor.
Mortgages and real estate are referral-driven businesses. The best way to find a competent, attentive banker and Realtor is to ask people you trust for recommendations.
Which to pick first? "My opinion is you work with a mortgage lender or bank or broker -- somebody who handles the lending piece -- first," Mills says. "We do not recommend that people talk to an agent before they understand how much they can afford."
The lender will confirm -- or correct -- your calculations regarding how much you can afford to pay for a house, given the interest rates you can qualify for. The lender can advise you how to boost your credit score quickly, if necessary. "If you are constantly late on your car payment, they're going to show you what that translates into from a credit standpoint," Mills says. "They'll say, for example, that you need to make that payment on time the next three months." A small change like that could be enough to move a borrower to a lower rate.
Nail down the neighborhoods
Finally, it's time to get referrals to one or more real estate agents, interview them and choose one you feel comfortable with. At first you shouldn't concentrate on specific houses. Focus instead on neighborhoods.
"Buy the best location that your budget will allow," says Diane Saatchi, a real estate broker with Dayton-Halstead Realty on Long Island. "You can always fix the house."
She says the most common mistake that buyers make is falling in love with a house and overlooking the location. "The problem with those locations where you get more house for the same dollar is that they're just harder to sell."
Saatchi points out that the May-through-August hot selling season coincides with the most pleasant time of the year in much of the country. Leaves are on the trees, lawns aren't brown yet, flowers are in bloom, ugly gray slush is a memory. In short, houses look nicer in spring and early summer, and that benefits sellers. So Saatchi advises buyers to also shop around in late winter, while the trees are bare and flowerbeds look forlorn.
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