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How to Prepare for a Home Purchase in 2022


The housing market is red hot right now.

Since the start of the pandemic, housing prices have soared. According to recent studies, American home prices increased an average of 18.8 percent in 2021.

This trend could continue throughout 2022.

Despite rising prices, houses are selling at record speed and bidding wars are commonplace.

For example, in 2019, a new house was generally on the market for approximately 51 days. In 2021, they generally sold within 24 days.

These homes aren’t just selling faster, but they’re selling for more than their asking prices. In fact, 52% of U.S. homes sold in January 2022 went for more than their list price.

As a prospective homebuyer, you must have a strategy in place to move forward with confidence — no matter how competitive the market may be.

Check out this comprehensive guide to prepare you for the home buying journey.

Step 1: Set Your Spending Limit

Start slow. Begin by setting a home purchase budget.

While it may seem obvious, it is very important to establish a spending limit early on in the process.

Fight your FOMO when shopping for houses. Given the competitiveness of the market, it is all too easy to get into bidding wars and spend more than you planned.

So how much should you spend?

Generally, financial experts tell consumers to limit homeownership costs to 28% or less of their gross monthly income.

Whatever you decide, make sure your mortgage doesn’t overwhelm the rest of your financial needs.

Note: To help determine your spending limit, use this housing affordability calculator by Zillow.

Step 2: Check Your FICO® Credit Score

While lenders will assess multiple factors in your financial profile, your credit score will likely be an important factor in determining your mortgage eligibility.

According to Rocket Mortgage, most conventional loans typically require a FICO score of 620. The higher your credit score, the better your interest rates will be.

If your score isn’t where you want it to be, don’t rush the process. It takes time to improve your credit, and the results are well worth the wait.

Want to check your credit score for free? Visit Experian.

P.S. For more tips to improve your credit in the home-buying process, click here.

Step 3: Save Up for Your Down Payment

Before obtaining a mortgage (which we’ll discuss in a moment), you’ll first need to save for your down payment and closing costs.

Generally, the minimum down payment for a conventional loan is about 3 percent, while the average down payment hovers closer to 6 percent.

Some financial analysts believe that paying more upfront is ideal. One editorialist at Time Magazine puts it rather bluntly: “If you can’t put 20 percent down on a 15-year fixed rate mortgage, then you probably can’t afford to buy a home.”

It is certainly true that the more you pay upfront, the less you’ll shell out every month.

Note: Don’t forget about closing costs — the fees associated with setting up and closing a new mortgage. In fact, you should expect to pay between 2 to 5 percent of your total loan amount on closing costs alone.

Step 4: Explore Mortgage Options

Now it is time to explore your mortgage options.

As you’ll see, there are different types of mortgage loans, including:

  • Conventional Mortgages, which first-time buyers may be able to obtain for as little as 3 percent down.
  • FHA Loans (Federal House Association), which are guaranteed by the government and offer down payments as low as 3.5 percent. Typically, FHA loans offer generous credit parameters (as low as a 580 FICO® score), which can be very appealing for first-time buyers.
  • USDA Loans: Designed for rural homebuyers, USDA loans usually require no down payment and are fully backed by the U.S. Department of Agriculture.

Note: While you may have options to consider, a fixed-rate mortgage guarantees a predictable monthly payment and protects you from rising rates.

Step 5: Get a Pre-Approval Letter

After you choose a lender, make sure to request a mortgage “pre-approval” letter.

This valuable document shows real estate agents you’re a serious buyer. As a result, it could give you an edge over other prospective shoppers who aren’t pre-approved.

Once you receive the letter, it typically lasts between 60 to 90 days.

During the pre-approval process, lenders will execute a comprehensive assessment of your financial life, including your credit score, your annual income, and your assets.

Once you’re pre-approved, you are likely to receive the loan (so long as your financial situation doesn’t change significantly).

Step 6: Hire a Real Estate Agent

It’s helpful to have a real estate agent on your team, especially right now.

As your personal advocate, they’ll help you find the right home, negotiate with confidence, and manage all the paperwork.

Remember: Real estate agents are paid commission only on the actual sale of a home. So while they will undoubtedly charge a fee, their financial success depends on your ability to actually find and buy a home.

Though there are many real estate agents you can hire, take your time to find the right fit.

For starters, seek agent referrals from other home buyers in your social circle. Interview multiple candidates, and feel free to request references from them.

You’re going to spend a lot of time with your real estate agent, so you want to make sure they are truly aligned with your needs and expectations.

Step 7: Start Home Shopping

Still with us? Good, because it’s finally time to start house hunting!

Once you have hired a real estate agent, you can browse listings.

Thanks to our digital economy — and a little nudge by the pandemic — you can take advantage of 3D home tours, which have become very prominent over the last two years.

While you can research on your own, your agent will likely have greater access to new listings. As they send you ideas, keep an open mind, take notes on your preferences, and if you get to visit in person, take pictures of everything.

After all, it is very easy for listings to blur together, so do what you can to keep the facts straight.

Eventually, you’ll develop a shortlist.

While this can be a very exciting time, stay as practical and specific as possible. In other words, get a close-up look at the inner workings of the house: the insulation, the plumbing, the garage, the electrical systems, the chimneys, the appliances, and more.

Remember: when you buy a home, you are buying every part of it. And once you own the house, the cost of repairs rests squarely on your shoulders.

Make sure you know exactly what you are buying before you sign on the dotted line.

Step 8: Make Offer(s)

Finally found the perfect home? Congrats!

Now it’s time to make an offer.

As a team, you and your agent will determine how much you are willing to bid. Stay within your budget, and consider the following points:

  • What are the asking prices of similar homes in the area?
  • Does the house need any major repairs? What would the renovations cost? Would the seller consider making those renovations for you?
  • Assuming the house is in demand, what are competing buyers offering for it? How far above the list price are bids going?

These questions will help you set your cash deposit, which is often called “earnest money.”

While a standard deposit is about 2 percent of the total home price, the more money you offer, the better you may look to the seller.

Your earnest money isn’t wasted. Instead, it’s simply held in an escrow account and added to your mortgage down payment at closing.

Step 9: Hire A Home Inspector

After your offer is accepted, consider paying for a home inspection. These are comprehensive assessments of the structural and mechanical integrity of the house.

A home inspector will examine everything from the floors and walls to the drainage systems, roofing, and window alignment. They will ensure that the ventilation, appliances, and heating and cooling systems are safe and ready to use.

Note: Standard home inspections don’t always include tests for mold, radon, pests, or asbestos. If you’re concerned about specific problems, you’ll likely have to schedule multiple specialists.

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